Earnings Call Transcript - AMBA Q4 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the Ambarella’s Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participant lines are in listen-only mode. After the presentation, there will be a question-and-answer session. Please be advised today’s conference may be recorded. I’d now like to hand the conference over to Louis Gerhardy, Corporate Development. Please go ahead.

Louis Gerhardy, Corporate Development

Thank you, Liz. Good afternoon and thank you for joining our fourth quarter and fiscal year 2022 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO; and John Young, VP of Finance. The primary purpose of today’s call is to provide you with information regarding our fourth quarter and fiscal year 2022 results. 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 that we filed on March 31, 2021 for fiscal year 2021 ending January 31, 2021 and the Form 10-Q filed on December 10, 2021 for the third quarter fiscal year 2022 and in October 31, 2021. Access to our fourth quarter and fiscal year 2022 results press release, historical results, SEC filings, and a replay and prepared transcripts of today’s call can be found on the Investor Relations portion of our website. Fermi will first provide a business update for the quarter and the full year, John will review the financial results and then Fermi, John and I will be available for your questions. With that, I’ll turn it over to Fermi.

Dr. Fermi Wang, President and CEO

Thank you, Louis, and good afternoon, everyone. Thank you for joining our call today. Fiscal year 2022 represented an inflection year for Ambarella with numerous milestones achieved. Record revenue of $332 million was up 49% year-over-year, with CV revenue more than tripling to exceed 25% of total revenue and driving blended ASPs higher. It was the first year where CV delivered a material contribution to our operating results, enabling non-GAAP operating margin to reach 19% versus 4% the prior year. CV revenue Wave 2 smart home became material during the year as expected, and we are pleased to announce CV revenue from Wave 3 automotive also became material during the year. This occurred more than a year ahead of the guidance originally provided in June 2019. Turning to products, we expect CV5, our first 5-nanometer SoC, to begin mass production in the second half of fiscal year 2023. While CV3, our second 5-nanometer SoC, a 10 billion transistor automotive domain controller, is expected to sample this year. There is a strong and broad-based demand for our CV products. At the end of the year, we have cumulatively shipped more than six million CV SoCs to more than 275 unique CV customers across many verticals. Looking to fiscal year 2023, geopolitical and public health headwinds persist, and market forecasters predict real global GDP and the semiconductor industry growth rates will decelerate. There is a continuation of supply chain challenges. And in February, we were informed our 14-nanometer supply from Samsung will be constrained. At this time, we anticipate an adverse impact to our video processing revenue of approximately $5 million in Q2. Despite these headwinds, we see the secular forces from the digital transformation remaining very strong. In particular, demand for our deep learning AI processes for IoT endpoints, a majority of our customers' design activities not on CV, and we expect CV revenue to reach 45% of our total revenue in fiscal year 2023. Driving a further increase in our blended average selling price of the fewer of the lower ASP video processors are shipped. Now I will provide some representative market and market development activities during the quarter. We see the role running in the first week of January, hosting our annual technology showcase held during CES in Las Vegas and announcing our new CV3 AI domain controller. We held over 35 live technology demonstrations including our latest EVA autonomous vehicles, Oculii radar technology running both automotive and security applications, and numerous IoT demonstrations. The automotive partner demonstration included ADAS implementation from software partners, auto brands helping with AI as well as drive monitoring demos from C machines and CPI, all running on our CV4 SoC. On January 4, we launched CV3, our AI domain controller SoC family for single-chip multi-sensor perception, fusion and path planning in ADAS to level four autonomous vehicles. The scalable, power-efficient CV4 family of SoCs provides the automotive industry with the highest AI processing performance at up to 500 eTOPS, representing a 42 times increase over Ambarella's CV2 and 160 times that of CV22. The first CV3 family member is fabricated in 5-nanometer process technology and enables centralized single-chip processing for multi-sensor perception, including high-resolution video, radar, including Oculii software and other sense modalities. The family's unique hardware scalability allows automakers to unify their software stack across their entire product portfolios while reducing the cost and complexity of software development. We have received significant interest in CV3 from leading automotive OEMs and their Tier 1s following the announcement. In addition to automotive applications, we will be developing CV3 SoC derivatives targeting other markets, including security camera and robotic applications. This new CV family of SoCs will leverage the increased performance of the CV3 third-generation CV4 architecture, which provides over three times the power efficiency of the previous CV2 generation. In January, we announced our new artificial intelligence Image Signal Processor. This new ISV architecture uses neural networks to augment the image processing done by the hardware ISP integrated into our CV SoCs. We demonstrated it live during the show, showing full frame rate HD video capturing under 0.03 lux lighting conditions, in almost complete darkness. We believe this technology will be game-changing in all of our markets as our higher-quality video data now improves visibility in human viewing applications, but also improves the accuracy of AI processing algorithms in challenging lighting conditions. During the quarter, we made a number of automotive partnership announcements. We announced our collaboration with Autobrains, a developer of self-learning AI for assisted and autonomous driving to deliver a scalable range of AI solutions ranging from ADAS to higher-level autonomy for the automotive mass market. At the show, we demonstrated Autobrains' ADAS software running on a single CV2 automotive SoC. The collaboration will deliver a high-resolution ADAS solution targeting compliance with Vista NCAP standards. We also announced our partnership with Seeing Machines, the industry's leading vision technology company for driver monitoring applications. We demonstrated Seeing Machines software running on our CVflow AI platform. The partnership will enable the delivery of a complete integrated DMS and ADAS solution. We're also seeing new opportunities in automotive applications employing cameras for security, asset control, and customization of personal settings. During the quarter, Hyundai introduced Genesis, GV60 SUV with a face connect feature that recognizes the driver’s face, opens and closes vehicle doors, and provides customized settings for the driver using near-infrared cameras and deep learning technology. The face recognition module is based on Ambarella's CV25 AQ, automotive SoC. Also during the quarter, Rivian began shipment of its first consumer SUV, the R1S, and its first commercial vehicle, the new EDV 700 delivery van, designed in close collaboration with Amazon. As announced by Rivian, the R1 family comprised of the R1S and the R1T has 71,000 vehicles preordered, while Amazon has placed an initial order for 100,000 of the vans. Both R1S and EDV 700 have a camera platform based on Ambarella's solutions with multiple Ambarella CV2 SoCs being utilized for Rivian's autopilot called Driver+, Gear Guard, and driver-assistance. The EDV 700 delivery van also includes stereo forward-facing cameras enabled by CV2 building stereo processing capability. The rapid design and deployment of these vehicles, in addition to our other automotive production wins, reflects the maturity of our CVflow SoC and development tools. In February, the U.S. Department of Transportation's National Highway Traffic Safety Administration issued a final rule allowing automakers to install adaptive driving beam, or ADB, headlights on new vehicles. Adaptive driving beam headlight systems are useful for distance illumination of pedestrians, animals, and objects without reducing the visibility for drivers in oncoming vehicles. The use of cameras in ADAS perception to intelligently control the headlight beams represents a new opportunity for Ambarella's CV4 SoC. In December, we announced our early win in this area with a Chinese automotive retail technology company, HASCO Vision, and IM motors. A new automotive technology company jointly created by SAIC Group, Wangjing, Hi-Tec, and Alibaba Group. At the 2021 Shanghai Auto Show, IM Motors announced its new L7 electric vehicle which began sales in February. It includes an intelligent DLP lighting system based on our CV22AQ automotive SoC that can perceive the driving environment and provide visual warnings to pedestrians as well as automatically adjust the width of the headlight beams under narrowing road conditions. Also in China during the quarter, Hycan, an EV vehicle joint venture between GAC Group and the electric car maker NIO introduced its Z03 SUV. The Z03 includes Hycan PILOT 2.0, an intelligent driving assistance system based on our CV2AQ SoC and supplied by Tier 1 Max AI. Now I will talk about some of our IoT customers' product introductions during the last quarter. In the enterprise camera market, Motorola Solution announced their expansion of its license plate recognition portfolio with the introduction of the L6Q camera based on our CV25 SoC. The L6Q can accurately scan vehicles moving at up to 75 miles per hour and up to 70 feet away. It can be powered by battery, solar panel, or AC/DC power and can operate in complete darkness. Also in the enterprise and public market, Ricarda introduced its CD42 and the CD52 dome cameras based on our CV25 SoC and Panasonic i-Pro sensing solution introduced its i-Pro mini, a versatile network camera based on our CV22 SoC. In the smart home market, Comcast introduced its first video doorbell based on our SoC, supporting 1080p HD video, crystal clear night vision, and a wider 4:3 aspect ratio that allows you to see more of your doorstep. In the smart home market, Ubiquiti introduced the T4 doorbell pro, a WiFi-enabled video doorbell with a primary 5-megapixel camera and a second 8-megapixel backup camera. Ubiquiti also began shipping its AI 360 PTV camera, which provides panoramic overhead surveillance and is based on our CV25 SoC. We are also seeing opportunities in new AI camera IoT applications, including robotics and video conferencing. During CES, HMS, an AI factory automation company based in Japan, announced and demonstrated its new SiNGRAY AI 3D camera designed for robotic and Industry 4.0 applications. In this application, Ambarella's CV25 SoC provides camera perception and fusion, combining the RGB camera and the ToF dual sensors. The product is being supplied to Japanese robotic leader, Yaskawa for robotic arm applications. In video conferencing applications, an example of one of our first wins is from Nineveh, a Chinese-based leader in communications and video conferencing. Their new UV 43 Series ultra-HD PTV video conferencing camera based on our CV22 SoC offers 4Kp60 video, 25x optical zoom, and pan/tilt zoom operation. In summary, these engagements indicate we are successfully leveraging our state-of-the-art shooter viewing video processor expertise into markets for high-bandwidth AI processors in machine sensing IoT endpoints. Much of the early CV growth we have experienced has been driven by new product cycles in existing markets like security cameras, but we are extremely excited about the penetration we are achieving in multiple new market verticals, such as the robotic arms, automotive payment, or automotive access control mentioned earlier. The mega trends for security, safety, automation, and eventually complete autonomy of robotics are key drivers in our market, and they are key drivers for our TAM expansion, increasing from about $4 billion this year to approach $10 billion in calendar year 2027. We suppress our sake expanding; the market opportunities are now much larger. We are engaged in discussions with multiple customers where the lifetime revenue of any one program could be more than 20 times higher than what we have experienced in the past. With evidence mounting, we are more convinced of the positive secular trends of our AI products. To sustain and grow our leadership position, we have and will continue to make premium investments in our differentiated semiconductor and software R&D. Our organic R&D investment leads the way and has been augmented with our synergistic acquisition of HD radar leader Oculii. Our R&D investment includes new perception technology development, the future for cameras and radars, automotive functional safety, next-generation process on 3 or 4-nanometer technology, and software margins higher up the stack. I would also like to provide an update on Oculii about four months after we announced the acquisition. We are very pleased with customer interest and activity with our proprietary HD radar products, and many cross-selling opportunities were discussed with customers during CES this year. Since the acquisition, we have seen a significant pickup in the number of radar module customers. In fact, during Q4, we shipped a record number of 77 gigahertz radar modules. We understand many of these customers are evaluating the technology for their production programs, and we plan to continue to aggressively hire to support the strong interest and outlook for our HD radar technology. In conclusion, after more than five years of ADAS investment, fiscal year 2022 represented a firm inflection for Ambarella, and while decisively established, we're still in the very early stages of the AI automotive market development. We are very pleased with our progress. Evidence continues to build, and we remain convinced the market opportunity is very significant. We are committed to sustaining our strong investment to capitalize on our leadership position. And along the way, we are committed to delivering positive operating leverage added of $500 million and a $1 billion annual revenue milestone, as indicated during our Capital Market Day in January. With that, John will now provide our prepared financial comments.

John Young, VP of Finance

I will review the financial highlights for the fourth quarter and the full fiscal year 2022 ending on January 31, 2022, and provide a financial outlook for our first quarter of fiscal year 2023, ending on April 30, 2022. I will be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense and acquisition-related costs adjusted for the impact of taxes. Fiscal year 2022 revenue increased 49% year-over-year to $331.9 million. Security camera revenue was close to 65% of total revenue, up more than 50% year-over-year. Auto revenue more than doubled year-over-year and represented almost 25% of total revenue. Our other business declined roughly 20% year-over-year to represent slightly more than 10% of revenue. For fiscal year 2022, non-GAAP gross margin was 63.4%, up from 61.4% in fiscal year 2021. Despite some higher costs and expenses, our customer mix and product mix improved and the pricing environment was relatively stable. Non-GAAP operating expenses increased 15% for the year, with the majority of this increase in our organic R&D investment. For the 14th consecutive year, we reported positive annual operating cash flow, which was $38.8 million in fiscal 2022. With no debt, net cash on hand totaled $171 million at the end of the year. Q4 revenue of $90.2 million was slightly above the midpoint of our guidance range, with CV ending the year on a strong note. Q4 revenue declined 2% sequentially, well above the five-year average of down about 10% sequentially. With several new video processor and computer vision programs commencing production, auto revenue increased more than 30% sequentially. Security camera and other revenue declined about 10% sequentially. Non-GAAP gross margin for Q4 was 64.8%, above the high end of our guidance range of 63% to 64%. Despite some increased costs, the more diversified nature of our business, a relatively stable pricing environment, and a richer customer and product mix all contributed to the strong gross margin performance. Non-GAAP operating expense for the fourth quarter was $40.3 million compared to $35.6 million in Q3. This was slightly above the midpoint of our guidance range of $39 million to $41 million. Non-GAAP net income for Q4 was $17.9 million or $0.45 per diluted share compared to $22.2 million or $0.57 per diluted share in the third quarter. In the fourth quarter, the non-GAAP earnings per share were based on 39.7 million shares. Total headcount at the end of the fourth quarter was 899, with about 82% of employees dedicated to engineering, most of whom are focused on software. Approximately 65% of our total headcount is located in Asia. In Q4, we generated positive operating cash flow of $20.6 million. Total accounts receivable at the end of Q4 were $44.5 million or 45 days sales outstanding, in line with the 45 days outstanding at the end of the prior quarter. Net inventory at the end of the fourth quarter was $45.2 million or down about 4% in dollars from the $47 million at the end of the previous quarter. On a days basis, inventory increased to 128 days in Q4 from 118 days in Q3. We had two customers represent 10% or more of our revenue in Q4. WT Microelectronics, a fulfillment partner in Taiwan, who ships to multiple customers in Asia, came in at 59% of revenue; and Hakuto, a distributor for automotive customers in Japan, came in at 12% of revenue. Revenue from Dahua and Hikvision declined more than 60% sequentially and more than 75% on a year-over-year basis and represented about 2% of total revenue in Q4 and 6% for the year. I will now discuss the outlook for the first quarter of fiscal year 2023. Underlying demand remains solid, but supply-side conditions are highly dynamic. First, as Fermi indicated, our lead times remain extended and we are now facing new challenges and uncertainty with regard to our suppliers' timing of deliveries for our 14-nanometer video processors. Second, some of our customers have experienced significant delinquencies from other component suppliers. As a result, some customers may choose to defer our shipments. Other customers may build inventory of our SoCs as they await a complete kit. We are also prepared for a potential public health lockdown in Hong Kong, where our main warehouse is located, by arranging alternate delivery routes to our customers. To the best of our knowledge at the current time, our guidance contemplates these new and existing supply chain challenges. Considering all these factors, we expect our Q1 results to be better than the 9% average sequential decline experienced in the last five years. We estimate our revenue to be in the $88.5 million to $91.5 million range or approximately flat sequentially at the midpoint. After a surging demand for several new programs in Q4, auto revenue is anticipated to decline sequentially, with IoT revenue increasing sequentially. As indicated at our January 4 Capital Markets Day, given our strategy and the related changes to our business, going forward, we will be reporting in two revenue categories, automotive and IoT. We estimate Q1 non-GAAP gross margin to be between 63% and 64%. We expect non-GAAP operating expenses in the first quarter to be between $41 million and $43 million, with the increase from Q4 primarily coming from increased engineering headcount, payroll tax accruals and other engineering expenses. The Q1 non-GAAP tax rate should be modeled in the 3% to 6% range. We estimate our diluted share count for Q1 to be approximately flat sequentially. Ambarella will be participating in the Morgan Stanley TMT Conference on March 9 and 10, the 33rd Annual Roth Conference on March 14, and Bank of America's 12th Annual Global Automotive Summit in April. During Q2, we will also be hosting virtual demos from our recent CES exhibition. Please contact us for more details. Thank you for joining our call today. And with that, I will turn the call over to the operator for questions.

Operator, Operator

Our first question comes from Matt Ramsay with Cowen.

Matt Ramsay, Analyst

Good afternoon. Thank you very much. Guys, my first question is, obviously, there's some sensitivities and changes with the supply situation from Samsung on 14-nanometer. So a couple of questions around that. I guess the first one is, in the prepared script, it sounded like you guys found out pretty recently, and there's going to be sort of a $5 million impact. I think you said Q2, maybe you could clarify that, how long you feel like that type of or magnitude of impact might continue to be a headwind into the back half of the fiscal year? And I guess the other part of the question is, does that mean that you're not yet seeing any of that impact in the guidance for April? Thanks.

Dr. Fermi Wang, President and CEO

Well, I think the guidance we just provided for Q1 has considered all of the potential impacts. We noticed this problem after Chinese New Year, and we have communicated with Samsung many, many times throughout the last few weeks to identify potential impacts. Our conclusion is our Q2 revenue will be impacted by approximately $5 million, and we're still working hard on Samsung to secure our second half supply. We believe that Q2 might be the worst case for the whole year, but we still need to confirm the supply situation with Samsung for Q3 and Q4.

Matt Ramsay, Analyst

Got it. Thanks, Fermi. I guess the other piece of the question around supply is more around the longer term. I mean you guys have worked with Samsung really since the birth of the company and Ambarella. Is there any change that happened on their side that caused the supply disruption, or do you get the feel that you're getting the priority with your supply partner that we would like? Are there any changes to that dynamic? And are you considering going forward any other sources of foundry capacity?

Dr. Fermi Wang, President and CEO

Well, I think our relationship with Samsung is still very strong. I think that you probably noticed that the 40-nanometer supply that we talked about is the same product line that we had a problem last year when Samsung Texas Foundry had a problem. So I think one of the reasons that has popped up is if there's any supply change, we really have no inventory to cover the problem. So I think that we still get a high priority from Samsung. But I think this shortage of 40-nanometer is severe, and I will just continue to see the result of that. In terms of considering a second source, we are working on 5-nanometer right now and any table, regardless of the other engineering costs, any table is $50 million. It's going to be a very costly proposal if we want to consider a second source. So at this point, I think we would like to understand what happened in Samsung and try to work out the catch-up plan so that we don't face a more severe situation in the future. But at the same time, I feel that Samsung is working hard to work with us to reduce the impact.

Matt Ramsay, Analyst

Thank you for that information. For my final question, you mentioned that as we look into the April quarter, following some stronger results in the previous quarters, the automotive revenue might see a slight sequential decline. Could you elaborate on the reasons for this decline? Additionally, what are your expectations for the growth of the automotive business throughout the full fiscal year? Thank you.

Dr. Fermi Wang, President and CEO

Well, first of all, I think our automotive business continues to be strong. This quarterly reduction is more like a seasonal decline, but also reflects that last year we had multiple products ramping up at the end of the year. I think that the ramping up really triggered a big surge in the demand, and now we are starting to see the regular run rate. So I think the combination of seasonality is the reason. But I still believe that our automotive business continues to perform strongly.

Operator, Operator

Our next question comes from Gary Mobley with Wells Fargo.

Gary Mobley, Analyst

Thanks for taking my question. I wanted to focus on the demand side of the picture. Fermi, you seemed to downplay some of the industry trends in your prepared remarks, mentioning decelerating trends. I'm curious about the extent to which the flat revenue trends you expect for three consecutive quarters, though better than seasonal, are affected by supply versus demand. To put it directly, did backlog grow during the quarter?

Dr. Fermi Wang, President and CEO

We still see a very strong demand, particularly on the CV side. We feel strong that we have great momentum on CV, and we continue to believe that our CV revenue will be more than 45% of this year’s total revenue. From that point of view, I think we feel confident that we are investing heavily in that direction, and we believe we're going to get paid off from that investment. From the supply point of view, 40-nanometer has been a problem for us between Samsung and us for more than 18 months now. So I hope that when the overall industry short supply becomes better, this problem will go away with us. For any other process node or any other product lines, we have not seen any supply issues from Samsung.

Gary Mobley, Analyst

Okay. On the thread of supply chain issues, I wanted to ask about what you're getting produced at Samsung, Korea, I presume almost everything CV is in Samsung Korea. Are you seeing any constraints on that particular fab?

Dr. Fermi Wang, President and CEO

Just like any other fab, the older fabs around are very tight, and we believe that Samsung's Korean fab is tight too, but we are convinced that at this point, we will not have any shortage on our CV product supply chain.

Operator, Operator

Our next question comes from Ross Seymore with Deutsche Bank.

Ross Seymore, Analyst

Hi, guys. Thanks for letting me ask a question. It's nice that you sized that $5 million impact, it's not fun to have to deal with that. But any sort of sizing about the supply side impact, if any, on either your fourth quarter that you just reported or the first quarter you're guiding to?

Dr. Fermi Wang, President and CEO

I don't think there's any impact on Q4 and Q1. We just realized this problem just a few weeks ago. So we are dealing with it immediately by disclosing to our investors the potential size or impact as well as the timing impact so our investors can understand the situation.

Ross Seymore, Analyst

Great. Thanks for that, Fermi. And I guess as my one follow-up, the non-CV revenue looks like it grew about 25% last year, which is really impressive. Can you just talk about what the drivers of that growth would be? And do you see them continuing this year excluding the supply limitations? I just want to figure out what sort of growth rate we should think about for the part of the business that's not included in the 45% CV.

Dr. Fermi Wang, President and CEO

Right. So last year, the non-CV revenue growth mainly came from security cameras and automotive; particularly a lot of automotive growth came from the non-CV product line. And this year— but however, last year, I also want to make a note that we continue to lose business from Hikvision, Dahua, we have been documenting the unit number drop. In fact, on John's script, he talked about that we are going to see revenue from Hikvision and Dahua go down from 6% last year to an even lower level. So I think from that perspective, the non-CV revenue will continue to have pressure because of Hikvision and Dahua. But also, I think that our CV product line is also replacing some of the video product line. So I don't expect that the video product line will grow another 25% this year. But the shortage from 14-nanometer is all video processors, which is non-CV, and they will continue to put pressure on our non-CV revenues.

Ross Seymore, Analyst

Do you expect the non-CV revenues to grow this year?

Dr. Fermi Wang, President and CEO

I don't think so.

Operator, Operator

Our next question comes from Andrew Buscaglia with Berenberg.

Andrew Buscaglia, Analyst

Hey, guys, maybe you could talk a little bit about the margin side. You had a great gross margin quarter, but operating margins were a bit lighter than I was expecting only because it looks like some of your operating expenses were a little bit higher. How much was that more so sort of self-inflicted versus anything supply chain related?

Dr. Fermi Wang, President and CEO

Well, there are some supply chain-related issues because I think the cost has continued to go up, not only just on the wafer side, packaging, testing, even delivery, all the costs are going up. However, I think the main driver of our operating expense growth is always on the R&D side. In fact, when we took out our CV chip, those R&D expenses on the IT side as well as the contractor side is definitely higher because that's such a huge chip, and we work very hard to put resource to solve that problem. So definitely, our operating expense will be driven by our continued investment in premium R&D, including the 5-nanometer, maybe even 4-nanometer tape-out, and also tools and continuing to hire further engineers in the future.

Andrew Buscaglia, Analyst

Okay. And then maybe one more on automotive, just with the guidance for Q1. You made some comments about customers maybe choosing to defer shipments. Was that specific to automotive? And then just kind of what's your confidence in that the demand versus a few weeks ago being there this year than it was prior to some of the stuff that's come to light?

Dr. Fermi Wang, President and CEO

I don't think the demand changed in the last several months or several weeks. The biggest change is that I think everybody is seeing that the automotive industry continues to have a supply problem, not only our supply problem but also the other materials, right? In fact, we continue to see our customers cannot build a product because of the lack of other components, microcontroller for one. So I think that's probably the biggest variable we are dealing with. I don't see a demand change. I still continue to see the uncertainty of supply as the biggest problem.

Operator, Operator

Our next question comes from Joe Moore with Morgan Stanley.

Joe Moore, Analyst

Great. Thank you. To the extent that you guys talked about these incomplete kit type issues, where they may have excess inventory of your product. What markets do you see that as being more likely than others? Is it spanning all the markets? And is there anything you could do to help us quantify what that impact might be?

Dr. Fermi Wang, President and CEO

Well, we start seeing it. We see pockets of inventory, and some of it is automotive. Some is security. It really depends on how customers' purchasing criteria, right? Some customers continue to buy our chip until they realize that they cannot get other components. Some people stop earlier, so they don't build inventory of our chips. So we see small pockets here and there across all the markets.

Joe Moore, Analyst

Okay. And any sense for the magnitude of it? Like is this extreme by historical circumstances, do you think?

Dr. Fermi Wang, President and CEO

I don't think it's a huge amount yet. Otherwise, we should make an alarm to make it visible to our investors, but we want to talk about what we're seeing in this and because we start seeing people pushing out the demand because of that. But I don't think that's a severe problem just yet.

Operator, Operator

Our next question comes from Kevin Cassidy with Rosenblatt Securities.

Kevin Cassidy, Analyst

Thanks for taking my question. Maybe just another way to ask Joe's question. In the security camera business that was down 10% quarter-over-quarter, was that mostly professional, or was it the home security camera?

Dr. Fermi Wang, President and CEO

I think it's both. I think both went down. But also, you have to remember that seasonality is clearly playing a major role there. If you look at our last five-year trend, both professional and the consumer market went down. So it's not a surprise to us.

Kevin Cassidy, Analyst

Okay. Given the shortage of supply, are you experiencing any increases in manufacturing costs?

Dr. Fermi Wang, President and CEO

In the last 18 months, we've continued to see increases, and we still observe that trend.

Kevin Cassidy, Analyst

Okay. And can you pass along that cost increase to your customers?

Dr. Fermi Wang, President and CEO

To a certain extent, yes. In the past, we did pass some of the cost increase to some of the customers when they tried to expedite delivery. But this time we saw the 14-nanometer problem; we did, because of the cost raised to a point where we had to reflect it to our customers.

Operator, Operator

Our next question comes from Tore Svanberg with Stifel.

Tore Svanberg, Analyst

Yes, thank you. Just a clarification question on the foundry situation. So is it purely just capacity, or are there some other technical yield issues? Because it sounds like you've had some issues for the last 12 months. Is it just purely capacity?

Dr. Fermi Wang, President and CEO

I think right now, what we're seeing is that we don't get enough allocation, but what’s the real reason behind it, I don't want to speculate because Samsung didn't tell us. But I think it's become clear in very early January that they either got overbooked, or they have other issues that we are not familiar with, but they have to reduce the allocation to us in Q2.

Tore Svanberg, Analyst

That's very helpful. And can you just elaborate a little bit more on the timing for CV5 and CV3? So I think you mentioned revenue contribution to CV5 late this year, are you expecting CV3 revenue maybe the second half of next year still?

Dr. Fermi Wang, President and CEO

Yes, you are correct about CV5. We anticipate revenue from customers in the second half of the year, specifically from both the security camera segment and some traditional consumer products. Regarding CV3, we are currently sampling to our customers, and I expect revenue to materialize much later, primarily from the automotive sector.

Operator, Operator

Our next question comes from Quinn Bolton with Needham.

Quinn Bolton, Analyst

I wanted to ask about the video processor demand. Do you think that if you don't receive the allocation from Samsung in the second fiscal quarter, that demand will go elsewhere, or will it just be pushed to fiscal Q3 or Q4?

Dr. Fermi Wang, President and CEO

Quinn, my gut feeling is this: if this is a one-quarter problem, I think our customers probably can wait, and their customers can wait. But if this drags along further, I think some of the revenue will become perishable. So it really depends on how fast we can work with Samsung to control our problem and provide much better visibility to our customer for Q3 and Q4.

Quinn Bolton, Analyst

Got it. And then hike in dollar down to 2% of sales. Do you think that they recover over the next couple of quarters, or do you think that they just continue to represent a very low single-digit percentage of revenue going forward and effectively become immaterial at this point?

Dr. Fermi Wang, President and CEO

Yeah, I think they will stay at that level. Last year, if you look at a whole year, they were still probably 6% of total revenue. This year, they will be at a low single-digit, probably steady until they become non-material.

Operator, Operator

Our next question comes from Vivek Arya with Bank of America.

Vivek Arya, Analyst

Thank you for taking my questions. The first one I actually have is on your balance sheet. When I look at the cash level, it's strong, but it's at the lowest level since fiscal 2015. And I'm curious, Fermi, will you need to raise more, whether it's to execute on the R&D roadmap, or more importantly, will you need to provide long-term supply agreements with your foundry suppliers? Because we are seeing many of the computing players prepay for capacity, is that something that you will also need to consider, so you are assured of supply going forward?

Dr. Fermi Wang, President and CEO

Right. So they are two separate questions. So the first question is because of the acquisition of Oculii, our cash flow dropped to $150 million. But I think you also noticed that in this quarter, we generated $20 million cash flow. From this point of view, if we don't need the extra cash in the near future, we don't need to really raise any funding. But you made a great point that there are many companies out there trying to commit cash to secure their foundry. That's something we are considering doing. However, if we want to do it, really, we can get a line. We talked about this last time that we can easily get a line to help us bridge that demand. So I think the worst case is we're going to a line, but we're not considering any secondary at this point.

Vivek Arya, Analyst

Got it. Very helpful. And for my follow-up, just a quick one on Q2, the $5 million impact, does it kind of mean conceptually, Q2 sales closer to $85-ish million, or are there kind of positive offsets from the CV side? And are there any gross margin implications? Because you had very strong margin in Q4 but you're kind of getting back to a trend line in Q1. What happens when you have this additional supply issue? How should we think about just the puts and takes around the sales and the gross margin that the best insight you have today would be very helpful.

Dr. Fermi Wang, President and CEO

Right. I think when we said $5 million, it's really directly impacting our top line. So it's really just revenue; we believe we lose $5 million in revenue in Q2. So that's probably answer to your first question. From a gross margin point of view, there is a combination of cost increase as well as we talked about, we have to raise the price to certain 40-nanometer customers. That combination, we need to factor into our guidance. So that's why you see our guidance on the gross margin line. So I think we continue to believe that long-term, our gross margin is 59% to 62%, but in the next quarter is based on the 63% to 64% guidance right now.

Operator, Operator

Our next question comes from David Kelley with Jefferies.

David Kelley, Analyst

Thanks. Good afternoon, guys. Maybe just a question on customer and product mix. Clearly, it's been a tailwind. How are you thinking about the sustainability of that benefit into 2023?

Dr. Fermi Wang, President and CEO

Well, I think from a computer vision point of view, all the indications that we have really make us believe that we have very strong support, not only customer base but also revenue growth. We talked about 25% total revenue last year to 45% total revenue this year. Also, we talked about the customers that we engage and the number of customers that we take into production. So we continue to believe that story is very strong, right? So now, I think this 40-nanometer product line shortage will definitely impact the video processor product line and also impact the revenue, but also some design win activities; people probably want to look at in Q3 and Q4. If we cannot deliver how they can satisfy their revenue. So I think that definitely impacted that we need to evaluate quickly and what we sense on to solve the problem.

David Kelley, Analyst

Okay. That's helpful. Thank you. And then maybe one more following up on the earlier automotive deferral conversation. I was hoping to talk if you could talk a bit more about the timing of what you're seeing there. Did your customers start to pull back in January as some of the production disruptions were picking up again, or is this something that you were seeing earlier in Q4 as well?

Louis Gerhardy, Corporate Development

Yes. Just to be clear, David, this is Louis. We didn't talk about an automotive deferral. In fact, our automotive revenue increased 30% sequentially in Q4 as we had a number of new programs kick in in multiple geographies for both video processors and computer vision. So in Q1, we do see our automotive business down a little bit sequentially, but we do expect auto to be a key driver of growth in the next year.

David Kelley, Analyst

Okay. Thanks, Louis. One more, if I may, just to follow up on that. The Q1, is that more of a seasonal pullback, or is there anything from a customer standpoint where they're pushing out order books with some of the OEM production disruptions?

Louis Gerhardy, Corporate Development

Yes. No, I think it really comes down to several new programs that kicked in, again, for both video processors and computer vision. And now that they've established their initial inventory, now their order rate comes back to a normalized run rate. So those are the dynamics we think caused it.

Operator, Operator

Our next question comes from Tristan Gerra with Baird.

Tristan Gerra, Analyst

Hi. Good afternoon. Any way you could help us quantify the revenue contribution from the CV5 ramp in the second half? And then, embedded in that question, given the commentary that inventories are not a huge problem yet and suggesting it gets worse, any attempt to gauge when the inflection point quarterly is going to be this year?

Louis Gerhardy, Corporate Development

So for CV5, we're comfortable with the ramp occurring in the second half of the year. There are multiple customers, multiple product areas where that's going to occur. So there's no change there and no change with CV3. I didn't understand your question about inventory. Could you just rephrase that or repeat it?

Tristan Gerra, Analyst

Yes. I think, Fermi, during the Q&A, mentioned that inventories were not a huge problem yet as part of an answer to a question. So it suggests that it might get worse in terms of inventory corrections. I'm just trying to look at the timing of where we should expect an inflection point.

Dr. Fermi Wang, President and CEO

We are currently trying to find an answer to that question, as there are numerous supply chain issues beyond our control. Many of our customers are delaying their demand for our silicon because they are unable to source other silicon components like microcontrollers, WiFi chips, or PMICs. Until they gain better visibility, we won't have improved visibility ourselves. This situation is indicative of an industrial problem where, until the shortage of other components improves, we will have very limited insight into the inventory levels within the supply chain.

Operator, Operator

Our next question comes from David O'Connor with BNP Paribas.

David O'Connor, Analyst

Great. Thanks for taking my question. Maybe firstly, a question for John on how we should think about the OpEx growth for this fiscal year ahead? Should we kind of take what the trend was last year? That's my first question. And then secondly, just a clarification on the seasonality for Q2, typically up, but given the Samsung issue and also the deferred shipments, can you give us any more on kind of the puts and takes there of how we should kind of model that for looking out towards Q2? Thank you.

John Young, VP of Finance

Yeah. So as far as Q2 goes, I think, really, the only guidance that we're giving at this point is just the $5 million issue. And so beyond that, that point on revenue in Q2, we don't really want to make any additional comments at this time just because we're looking to get more visibility as we get closer to that. I think with regard to OpEx, as I think we said in the prepared remarks, our expectation, our plan is to continue to invest in premium R&D that we've been developing in-house year after year. So that's going to take on several different initiatives, developing modules for the complete automotive stack, higher up the stack. That's one of the initiatives that we have, developing chips that fully take advantage of the Oculii radar that we recently acquired their technology, continuing to hire. And so I think while we are at an inflection point for the CV revenue, and we expect that to be very favorable for us on a long-term basis, I think in the near term, we are expecting to continue to invest. The level of investment that we've seen in fiscal 2022 is indicative of what we might expect going forward.

Operator, Operator

Our next question comes from Martin Yang with Oppenheimer.

Martin Yang, Analyst

Hi. Good afternoon. Thank you for taking my question. My one question is on your business development activities in China. It seems that there are a lot more non-automotive, non-IT security e-commerce projects going on. Has there anything changed as a result of lower revenue exposure to your IP customers in China, or that's basically reflective of normal design activities among the Chinese customers?

Dr. Fermi Wang, President and CEO

In our script this time, we didn't discuss any Chinese security camera customers, but we did mention several Chinese automotive customers, including a video conferencing customer and an interesting automotive technology related to automatic beam control for lighting. I don't believe there are any significant changes in the Chinese security camera market. That market is currently highly dominated, and as we discussed our supply situation with them, I don't think we indicated any major changes regarding the Chinese security cameras.

Martin Yang, Analyst

Maybe, if I may clarify my question a little bit. I was asking if your overall business development maybe structure or resources have changed. So are you putting more resources into non-security customers or applications?

Dr. Fermi Wang, President and CEO

Yes, that's clear. We understand that the security camera market in China is very sensitive, and many of our Chinese clients prefer non-US suppliers. However, in other industries that are not as sensitive, such as automotive, we are still focusing our efforts in China because it remains a significant market where we can increase our market share. That's why we have a strong team in Shanghai and Shenzhen to support our development in China. In fact, we also see Oculii RADAR that China can be a very, very good market for them too.

Operator, Operator

Our next question comes from Brian Ruttenbur with Imperial Capital.

Brian Ruttenbur, Analyst

Yes. Thank you very much. If I dig down a tiny bit on the security business, can you tell me what percentage of your revenue was security in the fourth quarter?

Louis Gerhardy, Corporate Development

Hey, Brian, this is Louis.

Brian Ruttenbur, Analyst

Hey, Louis.

Louis Gerhardy, Corporate Development

Yes, security in the fourth quarter was around 60%. For the year, security overall grew a little more than 50%, and it was around 65%.

Brian Ruttenbur, Analyst

Okay. So 65% on this fiscal year that just ended. Can you talk then about where you see it at least in the first quarter, or for fiscal 2023 would be great. But at least the first quarter, where do you see that percentage going? I assume down from 60% to 55%. How much of a stair step are we talking about in terms of the security revenue as a total?

Louis Gerhardy, Corporate Development

Yeah. So we see that IoT category, where security is the largest part of it, growing sequentially in Q1. But as you know, with automotive growing to be 65%, 70% of our SAM over the next five to six years over time, our revenue mix should shift in that direction.

Brian Ruttenbur, Analyst

Okay. Do you have a percentage that you're targeting for the first quarter that's going to be IoT/security?

Louis Gerhardy, Corporate Development

No, we don't have a figure for that other than it will grow sequentially. That's our expectation. And auto, we expect to have a slight decline in Q1 given the fact that we talked about earlier.

Brian Ruttenbur, Analyst

Okay. And then just finally, on that same point. Is this more a demand issue or a supply issue on the slowing on the security side?

Dr. Fermi Wang, President and CEO

I think it's a seasonality, right? If you look at the seasonality in the last five years for the professional or consumer security camera, it's always that seasonality always plays a role from Q4 to Q1.

Louis Gerhardy, Corporate Development

Yeah. I mean, there has also been a factor in the last two to three years where Hikvision has been more than 25% of our revenue, and you heard now they're in the very low single-digit range combined. So that's been a factor over this period of time.

Brian Ruttenbur, Analyst

Great. Thank you very much.

Operator, Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Dr. Wang for closing remarks.

Dr. Fermi Wang, President and CEO

Thank you, and thanks to all of you for joining the meeting today. I'm looking forward to seeing you at some other opportunities in the near future. Thank you. Goodbye.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.