Ambarella - Earnings Call - Q1 2021
June 2, 2020
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to Ambarella's first quarter fiscal year 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. 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 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 will 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 the well-being of our global workforce has always been 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 remain high, with the disputes between China and the U.S. moving into the second year, and each round of foreign policy, trade, and/or IP matters can bring new risks. The global health pandemic, COVID-19, within a matter of months, swept the world and brings another set of risks to consider. This combination of risks, geopolitical and pandemic, caused the duration, severity, and the impact of associated common downturns to be unknown. Despite the fluid environment and the full quarter of challenges, in Q1, we delivered the 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, yet 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, although activity slowed in April and May as the customers altered work patterns for the pandemic. CV revenue momentum was strong in Q1 over a small base, and the CV represented a mid-single-digit % 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 the CV22FS, which were announced during CES.
After initial hardware verification work in our labs in Taiwan and the U.S., the majority of the work has been in software development, and our software engineers have become highly effective working from their homes. 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 VLSI team has also been very active during the quarter. We taped out our sixth 10-nanometer SoC, a new member of our CVflow AI SoC family that we look forward to discussing with you later this year. And we also taped out a test chip in advanced 5-nanometer process technology. The test chip will enable us to tape out future SoCs at this advanced process node, allowing us to maintain our performance and power advantages in future generations of chips.
I will now talk about our market and the customers, including addressing the impact of the COVID-19 virus. In the professional security camera market, we are seeing 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, and this, in turn, has impacted the demand for cameras. Once the industry has recovered from the effect of the virus, however, we see upside opportunity for cameras in medical, educational, retail, and access control applications, as well as new camera designs that include both thermal and video sensors, combined with advanced AI processing. The retail camera applications include people counting and distance monitoring for intelligent access control solutions, AI live video monitoring, and face recognition for contactless access.
Our design pipeline remains extremely strong, with camera makers continuing to develop cameras with advanced AI capability, and this quarter saw a number of significant customer product introductions based on our CVflow AI SoC solutions. During the quarter, Panasonic, Japan's leading provider of security surveillance solutions, introduced 10 new camera models based on Ambarella SoCs. The extensive new product lineup includes seven i-PRO series models based on our S3L H.265 SoCs and three AI network cameras based on our CV22 CVflow SoC. The AI cameras come in box, bullet, and dome configurations and leverage 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 additional security cameras with software analytics to help organizations keep employees safe through the appearance of health guidelines around protective face masks and physical social distancing.
This solution combined the power of video and intelligent AI-powered analytics running on Ambarella AI SoCs. Also during the quarter, Motorola announced it was acquiring UK-based IndigoVision, an existing user of Ambarella-based camera, to extend its video security and command center software product offering in European presence. In May, 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 has been designed on an open system architecture to support a broad range of video management and evidence management systems. Based on Ambarella's S5 SoC, the camera captures 1080p video, offers wide dynamic range processing, and operates for a full 12 hours.
And also during the quarter, the leading Korean video security camera company, Hanwha Techwin, introduced its Wisenet P series of IP cameras based on Ambarella's CV2 SoC, offering the highest AI performance of the CVflow family. The series included the TNB-9000 8K camera, which can zoom into any area of image while preserving details. It also includes three 4K cameras in different form factors and features advanced AI-based video analytics, including person, face vehicle recognition, people counting, queue management, and heat map. Also in April, March Networks introduced its ME6 series 6-megapixel IP camera based on Ambarella's CV22 AI SoC. The camera uses deep neural network processing power to accurately distinguish between people and vehicles and combines next-generation security analytics for accurate real-time detection and analysis of events. In the home security camera market, we have also seen some impact on sales as a result of customer order push-outs.
Typically, home security cameras are sold in retail or online, and the closure of retail stores has impacted demand. The majority of the cameras are manufactured by Taiwanese OEMs, which have generally remained in production throughout the crisis. Beyond the pandemic crisis, we see continued growth in this segment, including increasing demand for video doorbells and for cameras, including a greater level of intelligence. During the quarter, U.S. smart home company Vivint introduced its new Video Doorbell Pro based on Ambarella's S5L. The doorbell camera offers full 1080p video with wide 180 by 180-degree field of view to let you see both the faces of visitors and the packages left on your doorstep. Advanced camera analytics detect and notify you of the arrival of people and package delivery while two-way audio enables conversations with visitors.
In May, Logitech unveiled its new version of its Circle View security camera, supporting Apple's HomeKit smart home system based on Ambarella's S2LM SoC. The Circle View records 1080p video with 180-degree field of view, and it can capture infrared footage at night up to 15 feet away. In the access control market, Lumi, one of the largest smart lock brands in China, announced the Aqara P100 fingerprint smart lock with HomeKit support. The lock integrates an S2LM-based viewing camera, offers 1080p video, ultra-wide field of view, and lurking detection features. In the automotive market, our current revenue is driven primarily from OEMs' car recorders integrating into new models in Asia and aftermarket dash cameras sold in retail. Our OEM business has been affected by the temporary closure of automotive plants in Asia, while our US and European dash cam market has been impacted by retail store closures.
Additionally, the automotive market continues to remain weak, with many OEMs and Tier 1 suppliers shut down and decisions on future product generations delayed. Despite this, however, we have continued to make progress in our engagement for ADAS in electronic mirror applications. In the electronic mirror segment, car manufacturers are currently making decisions for single-channel electronic mirror solutions ahead of the three mirror designs that we had originally been targeting. Our SoCs provide an efficient and cost-effective solution for single-channel mirrors that also integrate other functions, for example, video recording. As a result, we are seeing revenue opportunities for OEM car designs with SOPs expected to begin in the 2023 timeframe. Ambarella is working with Inceptio, a Chinese company founded in 2018, to build a nationwide freight network using autonomous driving trucks. Inceptio's goal is to achieve secure, efficient, and economical transportation of the service to logistics customers.
This could be achieved using Inceptio's automotive-grade L3, L4 autonomous driving software and hardware working in collaborations with major automotive manufacturers. Inceptio is using Ambarella's CV2AQ, AEC-Q100, and the CV2FS SoC automotive SoC to enable advanced neural network-based AD applications. In April, Korean dash cam leader Thinkware introduced its QXD5000 model, featuring two-channel QHD + QHD video, smart remote viewing, and remote alarm notification. Based on Ambarella's H22A SoC, the dash camera also includes ADAS functions, including lane detection warning, forward collision warning, and traffic light changing alarm. As we have previously mentioned, we are continuing to win designs at customers that provide aftermarket fleet management solutions for commercial vehicles, as well as solutions for ride-sharing and taxi services. In addition to 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 SoC combines advanced imaging, powerful AI processing, and low power, making them an ideal solution for AI cameras operating in challenging automotive environments. We expect our customers to begin field trials and initial production in the fourth quarter of this year, deploying AI software solutions that are based on both their own in-house models and from Ambarella's ecosystem partners. In summary, with the environment around us being highly volatile and uncertain, we are fully committed to our strategy, and the long-term secular trends we're addressing remain intact. Our strategy to leverage our successful video processor heritage into the development of a highly optimized visual AI computer vision platform has not changed.
In essence, we are enabling a higher level of automation in multiple industries, and as the industry emerges from the current crisis, demand for a higher level of automation should be more important than ever, driving the large new markets we have identified in the past. Furthermore, our operating cash flow, financial discipline, and the liquidity and the strength of our balance sheet enable us to sustain our planned level of visual AI investments through these difficult times. With strong execution, we continue to expect our significant R&D investment to yield positive returns. Our CV strategy continues to be validated with broad customer activity and expanding lists of our customers in production, early CV revenue growth, and the new products and technologies that expand the platform and our reach into new markets.
For example, during Q1, five more customers entered production status with our CV SoC, three in the security camera market and two in the automotive market. In the next several months, we expect to begin to sample customers' first automotive safety integrity-level SoCs and the development of our new family of 5-nanometer SoCs continues to move forward. Finally, in response to the health pandemic, our corporate giving initiative, comprised of employee donation and a corporate match, raised more than $300,000 for various aid organizations in the regions we operate. I thank Ambarella's employees for their response to this giving initiative for managing their safety and the safety of those around them, as well as for their strong execution to support our customers and drive our own visual AI initiatives.
I will now turn the call over to Casey, who will give you more details about what we are seeing and expect 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 fiscal year 2021 ending April 30th and provide a financial outlook for our second quarter of fiscal 2021 ending July 31st. During the call, I'll 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 both public health and geopolitical challenges in Q1, and 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 business 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 mix in business. Non-GAAP operating expense for the first quarter was $31.9 million compared to $30.5 million for the previous quarter. OpEx increased primarily due to an increase in payroll taxes and an increase in amortization expense for the tape-out of new 5-nanometer and 10-nanometer SoCs. Other income of $1.3 million reflected the impact of lower interest rates.
The non-GAAP net income for Q1 was $1.3 million or $0.04 per share compared to non-GAAP net income of $4.9 million or $0.14 per share in the fourth quarter. In the first quarter, the non-GAAP earnings per share were based on 35.2 million diluted shares as 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 where there is 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, non-GAAP net income and non-GAAP loss per share for the first quarter of fiscal year 2020 ended April 30th, 2019, have been adjusted for the change in non-GAAP income tax effect and presented consistent 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 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 30th, 2021. As of today, the remaining $49 million available from the $50 million repurchase agreement authorized in June 30th, 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%+ revenue customers in Q1.
WT Microelectronics, a fulfillment partner in Taiwan, came in at 63% of revenue, and Chicony, a Taiwanese ODM who manufactures for multiple customers, came in at 15%. I will now discuss the outlook for the second quarter of fiscal 2021. The confluence of 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 3rd earnings call, we stated we were beginning to see order push-outs and cancellations. This trend, together with a slowdown in design activity, began in Q1 and we believe will continue in Q2. Most importantly, the pandemic has put global economies in sharp contraction with unemployment rapidly rising and the impact of changes in government, business, and consumer spending is significantly unknown at this time.
In addition to the health pandemic, as we have discussed for the last year, we continue to be a wide variety of geopolitical risks and situations remaining very fluid. Geopolitical risk, including new U.S. export control on advanced technologies, the risk of customers in China continuing to take action to reduce their dependence on U.S. components that they believe may be subject to export control, changes in the Entity List and/or tariffs, as well as market share shifts between our customers. We remain concerned about the dual China-non-China supply chain that is being created and how it impacts our customers in China. The Foreign Direct Product Rule announced by the U.S. on May 15th and the addition of 33 companies to the Entity List on May 22nd have further escalated tension, which may lead to an adverse reaction from the government and/or our customers in China.
In our prior earnings calls, we estimated 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 to anticipate weaker order patterns from both of these customers in the second half as they digest their safety stock of inventory. Based on these factors and our best judgment at the current time, we expect total revenue for the second quarter ending July 31st, 2020, to be in the range of $50 million ±6%. We anticipate the security market will be up sequentially, with automotive and other revenue expected to decline.
With a very wide range of public health and geopolitical forces impacting the outlook, at this point in time, we are unable to forecast beyond the second quarter. We estimate Q2 non-GAAP gross margin to be between 59%-60.5% compared to 59.1% in the first quarter as a favorable customer mix brings gross margins back into our long-term model of 59%-62%. We expect non-GAAP operating, excuse me, non-GAAP OpEx in the second quarter to be between $31 and $33 million due to increased engineering expenses, including amortization for the tape-out of our first family of 5-nanometer SoCs, as well as potential changes in our ability to continue to receive the engineering credit that we've talked about in the past. Second quarter other income should be modeled around $1 million, reflecting lower interest rates on our net cash position.
The second quarter non-GAAP tax rate should be modeled in the 15%-20% range. We estimate our diluted share count for Q2 to be approximately 35.3 million shares. Ambarella will be participating in the Bank of America Virtual Global Technology Conference on June 3rd, the Stifel Cross-Sector Insight Virtual Conference on June 9th, and the Roth London Virtual Conference on June 24th. Please contact Louis for more details on these events. Thank you for joining our call today. And with that, I'll turn it back over to the operator for questions.
Operator (participant)
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Joe Moore from Morgan Stanley. Your question, please.
Joe Moore (Semiconductor Industry Analyst)
Yeah. Thanks for letting me ask the question. I think you guys said of the five CV customers that are in production that two are in automotive. And 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 think 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 the 10%. I think although we have a less visibility on the second half, but we still continue to believe that we have a very good chance to deliver the 10% total CV revenue. And I think that's on track. We'll continue to report on the progress on that. So the 10% CV thing, I think, is definitely something that we think is important for milestone.
We continue to track on that. In terms of five customers, we didn't announce the name, but I think that auto revenue coming from most likely is a commercial vehicle for ADAS and/or fleet management for ADAS or internal monitoring. So those kinds of applications because they don't need an ASIL application. So it's easier and faster to get into production. So I think that's the kind of automotive production we're talking about.
Joe Moore (Semiconductor Industry Analyst)
Great. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Tristan Gerra from Baird. Your question, please.
Tristan Gerra (Senior Research 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 you as vendors? I think the number was about 20% in the prior quarter.
And also any details that you could add in terms of the new restriction list and potential impact this has. And then at the same time, putting into the mix HiSilicon being eventually cut off from TSMC and what type of dynamic does that create later this year for the camera market in China?
Fermi Wang (President and CEO)
So let me let Fermi answer the last question. But as far as geographic breakdown of revenue, we don't disclose specifically by country the geographic breakdown of revenue. A lot of our revenue in Asia and in China in particular goes through WT. So you can see that WT is a big part of our revenue. And a lot of that goes through WT as well as Chicony and others. But we don't specifically call out customers. I think people have made estimates as to what certain customers might be, for example, Hikvision or Dahua.
But we don't call that out. We just call out our over 10% customers, which are WT and Chicony.
Casey Eichler (CFO)
Right. So for the HiSilicon question, I think that first of all, I think that because the rule just came out and when we talked to our attorney, I think there's still a lot of details which are not very well understood. We're trying to understand that. And we haven't seen how our customer reacts to that ruling yet. But however, like we said before, we knew that this is going to continue to help us outside China. I think outside China, we already reported Panasonic, Hanwha Techwin, which used HiSilicon in the past. And you can see that from our earnings call this time. We do see that we're picking up design wins from them.
Inside China, I think it's a different story because there are multiple different factors playing at the same time. While HiSilicon might not, even TSMC cannot ship to HiSilicon. But however, at the same time, most of our Chinese customers are probably trying to avoid U.S. components at this point. And they probably will pick using other solutions if they have choice. But on the middle and high end, they have lesser choice. So there are so many uncertainties in China today, and the rule is so new. We are still watching how this progresses. And we are talking to our customers, particularly in China, to understand how they feel about it. So I would say if there's something for certain, I think outside China is definitely we see a positive for us. Inside China, it's still unknown.
Tristan Gerra (Senior Research Analyst)
Okay. Great. That's very useful.
Then just a quick follow-up. Are you seeing any lingering supply chain disruptions, including at your customers? And you've mentioned a significant rebound in your security-related revenue this quarter. Is that really backlog fill for what could not be built in Q1? Are you basically back in line with real demand in Q2 in security?
Fermi Wang (President and CEO)
First of all, from the supply chain point of view, I think our supply chain has seen very little impact from the COVID-19. However, we do see very strange ordering patterns from our customers. And when we talk to them, they do mention disruptions in their supply chains, particularly in the auto space. Also, we see some disruption in the supply chain for our security customers also.
However, I think security cam, if you look at among all our current market that we're trying to address, I would say the professional security camera is probably the least being impacted by COVID-19. And also, there are a lot of new demands like thermal sensors integrated with the cameras, like contactless cameras for sensing applications. So we do see opportunities for the professional security cameras. So maybe that's the reason that we are seeing a better result on the professional security side. But however, I did point out on the consumer security side, after all, it's a retail product. And with a lot of retail channels got shut down in the US and Europe, we do see that supply chain problem is one thing, but end demand is a different story. And because of Q3, Q4, end demand is still unknown.
And we are working with our customers to try to understand that as much as we can.
Tristan Gerra (Senior Research Analyst)
Very useful. Thank you so much.
Operator (participant)
Thank you. Our next question comes from the line of Tore Svanberg from Stifel. Your question, please. Yes.
Tore Svanberg (Managing Director and Senior Semiconductor Analyst)
Thank you. Fermi, I had a question on the professional security market. You mentioned the integration of thermal sensors and so on and so forth. Is that something that you're already offering? And if not, when would you expect to start perhaps delivering SOCs that would include thermal sensors?
Fermi Wang (President and CEO)
Well, first of all, we don't include the CMOS sensor or thermal sensor in our silicon. But we can interface easily with thermal sensors just like we interface with CMOS sensors.
So in fact, several of our customers, for example, FLIR and as well as Avigilon, they already start shipping some thermal cameras with a traditional security camera by using our solution, which is always very small at this point. But that proves the concept that using our existing chip, we can easily interface with thermal sensor. And in the future, we can even apply some kind of sensor fusion with our AI capability. So I think thermal sensor was a niche market in the past. But with the pandemic, you can see a strong demand. And in the future, there's a contactless and also try to do a little bit of screening with a temperature. I think that definitely drives the demands for this. So I think the answer to your question is our existing solution can interface with thermal sensor without any problems.
Tore Svanberg (Managing Director and Senior Semiconductor Analyst)
Very good.
As a follow-up on the automotive side of things, that market's been weak for you already for several months. Now that there's some production starting up again in that market, are you starting to see any positive signs or movements in the auto business at all?
Fermi Wang (President and CEO)
Well, we see some positive signs in China, but not other places. For example, although I am hoping that Japan can come back soon because a lot of our recorder business is in Japan. But the Japanese government has been on and off shutting down the plants in Japan. So it created unknowns to us. So I always say that from all the automotive business, we see more positive signs in China, but not anywhere else.
Tore Svanberg (Managing Director and Senior Semiconductor Analyst)
Great. Thank you very much.
Operator (participant)
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.
Ross Seymore (isManaging Director and Senior Equity Research Analyst)
Hi guys.
Thanks for letting me ask the question and congrats on weathering all these storms simultaneously. I guess 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. But as we've seen in the automotive market, down can be quite a severe magnitude. So any sort of quantification of that, even kind of ballpark ranges like you gave for what it actually did in the fiscal first quarter that you give us for your second quarter guide by segment?
Fermi Wang (President and CEO)
Yeah. So what I had said about the automotive and other is that we would expect that they would decline. To have an order of magnitude and visibility in this environment is pretty tough.
I think I'm directionally correct that for me to try to put brackets on it more tightly than that, I think would give you a sense that I have more visibility than I really do today. And that's really true for all of the markets. But because of some of the comments that Fermi just made, again, directionally, I do think that the security market will be up. But again, to quantify that is really, really tough in this current environment. I mean, we feel good and confident. And that's why we gave a guidance, although it'd be a little broader, that we have some visibility into Q2. To get too fine on it, I think would be difficult.
Ross Seymore (isManaging Director and Senior Equity Research Analyst)
Got it. Thanks for that color.
And then I guess for my follow-up, when you talked about that $10 million that you expect the customers to burn off into the second half of the year, have you seen their behavior actually start to change? It doesn't sound like it has yet. It seems like you have this somewhat ironic combination that the longer that trade tensions stay elevated, the more likely those customers want to carry buffer. So has anything changed to give you belief that that will be burnt down in the second half of this year? Or are you just basically sticking around waiting for that to happen just like the rest of us?
Fermi Wang (President and CEO)
Well, I think we are waiting. But also, we see some signs. First of all, I think the ordering pattern suggests that this ordering pattern slowing down basically suggests that they're burning off.
Because, like you said, they are continuing to ship in our cameras. But however, at the same time, the trade war now really shifting the gear toward how they're going to handle HiSilicon supply. So when they see our Chinese customers building our inventory, you should assume that they're probably building up a lot more HiSilicon supply than they are building ours, because we always said that we have no problem to continue to ship products to them at this point. I think that's a difference, so we do see some indication that they are burning off the inventory gradually.
Ross Seymore (isManaging Director and Senior Equity Research Analyst)
Got it, and I guess one final housekeeping one. Casey, how are you thinking about OpEx in the second half of this year? You did a good job in the first quarter.
I assume a lot of the variable costs that you can keep tight are already so. Is this kind of the run rate, first quarter, second quarter, of $32 million, the run rate going into the second half? Or are there some items that we need to appreciate that would be a little more lumpier in nature?
Casey Eichler (CFO)
Well, again, as we continue to push our roadmap forward aggressively, not only in 10-nanometer but in 5-nanometer, as you can imagine, the takeout costs, CAD tools, etc., all will amortize. That pushes that amortization up. And so you do have some build from that as you go out into the year. But we don't have any other programs that are dramatic that I would say are going to change the OpEx one way or the other.
Fermi Wang (President and CEO)
But I think that another thing I'll do is, obviously, at this current difficult time, watching our expense on other areas is very important for us. While we commit to continue to 5-nanometer and 10-nanometer silicon development, at the same time, we are very cautious in terms of hiring people, other expenses, including trade show travels, which naturally being cut back. And so we are watching our expense on this area, but we continue to commit on R&D expenses, not hiring, but on the tape-out and silicon development. And again, it's a little hard to tell when people are going to be able to feel comfortable traveling and these conferences are going to start to take place in person again in the second half. And so we'll have to watch that as well.
Ross Seymore (isManaging Director and Senior Equity Research Analyst)
Let's just hope it is the second half. So thanks, guys. Appreciate it.
Operator (participant)
Thank you. Our next question comes from the line of Adam Gonzalez from Bank of America Securities. Your question, please.
Adam Gonzalez (Research Analyst)
Hi guys. Thanks for taking my question. Apologies if this was addressed in the prepared remarks. My connection was a little bit spotty. But I just wanted to know how the current pandemic and crisis has really impacted your design momentum and pipeline, particularly in CV for autos. Have your customer interactions changed at all?
Fermi Wang (President and CEO)
Well, first of all, there are multiple different impacts. First of all, for example, because of working from home and some of the company or customers even only working two days a week. So definitely, the decision is being slowed down. And also, some activity, like engineering activity, got delayed. So I think that impact is clear.
What we are trying to figure out is whether when they come back to the normal stage, whether they're going to review how they're going to review their current investment level and how they're going to invest on different projects. That's, I think, something that we really will try to understand whether how that impacted us. We don't see a clear indication yet. But from the impact point of view, definitely, the current project working, the activity is slowed down and some projects got pushed out just because of working style.
Adam Gonzalez (Research Analyst)
Got it. And then on the perimeter security side in response to an earlier question, I think you alluded to some risk of the China customers perhaps wanting to procure chips from non-US customers moving forward. Outside of HiSilicon, you might be cut off from TSMC soon. What other options are there really in the perimeter surveillance market?
Fermi Wang (President and CEO)
Well, like we said before, on the low-end side, there are quite a few in China and Taiwan. So that's definitely a concern. However, in the middle and high-end, particularly on the CV, the mainstream like CV22, CV2 level chip, I don't think there is much of a choice. So that's why we are continuing to talk to our Chinese customers to understand it. But however, my gut feeling is that the U.S. and China situation continues to deteriorate, really trigger our customers have more concerns of using a U.S. component.
Adam Gonzalez (Research Analyst)
All right. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Jeff Kessler from Imperial Capital. Your question, please.
Jeff Kessler (Managing Director of Institutional Research)
Thank you. And thank you for taking my question.
With regard to access control, a number of the integrators who've been able to get into closed schools, closed government facilities, have been able to start for the first time getting involved, getting into empty spaces and beginning to install both access and video, and I'm wondering if you're seeing an uptick from your end markets in that area, particularly when it comes to some of the electronic network locks that integrate with video.
Fermi Wang (President and CEO)
Right, so we do hear from our customers they start re-engaging with their end customer and start doing those kind of things. But we haven't seen on the ordering pattern yet because there's obviously a delay. They need to empty their inventory level they need to deal with and they need to understand that. By talking to customers, we understand they already start re-engaging.
In fact, most of our U.S. customers on the professional security camera side told us they are re-engaging with the current customers already. So that's a great sign. And that's another reason we believe that the professional security has much less impact than the other market that we are dealing with. At the same time, and I also believe hopefully that when we go back to normal a little bit, in fact, we believe that the contactless monitor camera as well as other AI trends will continue to help us to establish our AI solution to this kind of market and enabling even more AI applications in the future.
Jeff Kessler (Managing Director of Institutional Research)
One other quick question on Axis and their introduction of body-worn cameras.
It appears that it isn't just Axis, but some other higher-end camera manufacturers are getting involved in trying to get more analytics on a mobile basis, getting mobile cameras out there, not just for police but for other uses as well. Are you seeing demand? Obviously, you've mentioned Axis and their mobile camera, but are you seeing demand from Axis and other companies at the high end that are going to need AI for mobile applications?
Fermi Wang (President and CEO)
Yes. The need is clear. And the challenge is how to do AI and the video and the streaming at a power consumption that can offer the camera can operate 12 hours in a row and offering all of the capabilities you just talked about. And with our solution, we are getting there. And also, we believe that our investment in the lower geometry process will definitely enable that.
However, for this market, I want to point out it's at the beginning of the demand. Because any wearable camera, if you use it only for policemen or even for security guards, the market size is limited. However, when you start figuring out other usage that will require this kind of camera, that could be really increased our TAMs. So I think the trend is there. But however, I think that because of technology limitation at this point, it gives us a roadmap that will continue to increase the performance, reduce the power consumption, add more AI performance to there, and enabling a much better customer usage and a better customer experience with this kind of wearable cameras. And that's what we're looking for.
Jeff Kessler (Managing Director of Institutional Research)
Okay. Great. Thank you very much. Appreciate it. Thank you for calling. Our next question comes from the line of Quinn Bolton from Needham.
Your question, please.
Quinn Bolton (Managing Director of Equity Research)
Hey, guys. Maybe first a clarification from Casey. On the second quarter outlook, did you say that the overall security market would be up, or was that just professional security? Just want to make sure I heard you right.
Casey Eichler (CFO)
Yeah. I said overall security.
Quinn Bolton (Managing Director of Equity Research)
Okay. Can you say whether that's both professional and consumer, or just your comment is the overall bucket?
Casey Eichler (CFO)
Yeah. I think overall we feel that is the right way to think about it. Again, because of the visibility that we've got, I don't want to get into specifics around what's going on. Fermi, again, has talked about a lot of customers, both professional and consumer, that are moving forward and we feel very good about. But I think I would keep it at just sequentially up for the overall security market.
Quinn Bolton (Managing Director of Equity Research)
Great.
Then Fermi, you kind of mentioned the slowdown in design activity in April and May. I assume it's too early in June to try to assess June trends. What do you think it takes for those companies or customers to start to re-engage? Does that they have to get folks back to the office? Is it that they just need time to figure out how to work and be effective working from home? Just wondering what your thoughts on kind of re-engaging with those customers are.
Fermi Wang (President and CEO)
I don't think it's required to go back to office 100%. It's really that, for example, some of our automotive customers, they not only working from home, they only work two days a week. So with that limitation, that really hurts the productivity.
I think even in California, people start talking about, "Well, we open in June gradually." I don't think we're going 100% into the office immediately. But I do think that we are going to plan a very slow but gradually progress by moving employees back to the office. So from that point of view, I think that the productive loss will be reduced. But I think the most important thing is really about there are some companies putting very strict rules about working hours for the employees. And that has to be removed for us to see back to normal working conditions.
Quinn Bolton (Managing Director of Equity Research)
Understood. And then the last question, you guys had mentioned the E-mirror design win. I know it's a little ways out, but just wondering if you give us any more detail. I think you said it was a single-channel E-mirror.
So just wondering, does that mean it's just like a rearview camera, or do you have both sides and the rearview? Or can you give us any sort of sense on the dollar content per vehicle for that win?
Fermi Wang (President and CEO)
So in the past, we focused on all three windows, but now three mirrors. But I think right now, what we add to it is we start doing a one-channel design. But the one-channel design also is one-channel plus some other function. For example, a lot of people are trying to use a one-channel but also add some other functions into their cameras. So I think the single-channel camera is a rear mirror. But also, all the customers that we talk to, they need a roadmap to leverage single mirror application as well as two mirrors as well, three mirrors.
So when you have a roadmap that covers all of that, it makes it easier for customers to use one supplier to address all the needs of electronic mirrors. That's what we are talking about. So although we are talking about single mirror design with this time, but I do believe that's leveraging our experience on three-channel in the past. And now we can offer the complete roadmap from the one-channel to three-channel at efficient costs. I think that's the reason we start winning those designs.
Quinn Bolton (Managing Director of Equity Research)
Thank you, Fermi.
Operator (participant)
Thank you. Our next question comes from the line of Suji Desilva from Roth Capital. Your question, please.
Suji Desilva (Managing Director and Senior Research Analyst)
Hi, Fermi. Hi, Casey. Can you just circle back to the consumer security market? I'm trying to put together the comments you made. You had momentum, I think, earlier in the year. And then the visibility is limited because of macro.
But you said the security market overall will be up. Just want to understand the qualitative comments you're making on the consumer security market, particularly going into what would normally be a holiday season, obviously. Different year this year. Correct.
Casey Eichler (CFO)
So first of all, last time we had this conference call, we made it clear that consumer IP cam is a market that really helps us to continue to grow our revenue. And we are saying that in the long-term point of view, that didn't change. However, in the short-term point of view, because a lot of retail stores that our customers use to sell their consumer IP cams through, some of the retail stores got shut down, and some of them even closed. So until those retail stores open, we have very little visibility of the second-half demand. That's what I'm trying to say.
Right now, just because all the business just gradually reopened, I think it will take weeks for our customers to decide how they want to respond to the selling season. Because as you know, if there's a selling season this year, we need to start preparing products, and they need to prepare their final systems and put into the channel. The process needs to start right now. We are waiting to see from our customers how they want to react to this reopening and how they forecast for the second half, particularly for the selling season.
Fermi Wang (President and CEO)
As you know, Suji, last year in the second half, we had the first wave of CV, which was in the professional security camera market. We talked about the consumer being a similar type of second wave in the second half of this year.
Clearly, with everything going on that we just talked about and Fermi's reference, it's a point in time where it's difficult to say or understand what, if any, impact is going to happen in the second half. Clearly, with consumers staying at home and everything else, it's just put a big cloud that it's hard to get much visibility into it. But we still feel it's going to be the second wave of CV. And then some of the automotive and other areas, the access control and robotics forming up the next waves in CV. But it's just hard for us to continue to make that call as precisely as we were feeling a quarter or two ago because of what's gone on.
Suji Desilva (Managing Director and Senior Research Analyst)
Okay. That's helpful color. And then maybe a higher-level question, perhaps, Fermi.
The product roadmap you have, the 10- and 5-nanometer products, can you talk about what the key vectors you're pushing on here in the roadmap are to stay competitive versus the GPUs and FPGAs in the market that you're competing with in the automotive market? Any color that would be helpful. I know we're all supposed to go to Italy fairly soon to see you guys live. But if you could kind of give us some color there, it would be helpful.
Fermi Wang (President and CEO)
So first of all, I think that low power consumption has been one key area that we try to differentiate. And we said that many times before that our silicon architecture gives us that low power consumption differentiation. But however, if we fall behind in two process nodes, we might lose that low power advantage totally.
With our competitors in the auto space and even in the security space, they are big companies. They are moving aggressively, moving forward. And we have to do the same thing. So for FinFET, it's across the board. For all the chips that we are doing for CV2 and CV22 and CV25, you should expect that FinFET we have chips to address both security camera as well as for automotive. And at the same time, for automotive, if you want to address CV2+ sorry, the level two plus solution that everybody's trying to get design win, the performance requirements continue to increase. And to achieve appropriate power consumption, which is much lower than our competitors, that we need to not only leverage our silicon architecture but also move to FinFETs to keep our advantages.
Suji Desilva (Managing Director and Senior Research Analyst)
Okay. Thanks, guys.
Operator (participant)
Thank you.
Our next question comes from the line of Charlie Anderson from Colliers Securities. Your question, please.
Charlie Anderson (Senior Research Analyst)
Yeah. Thanks for taking my question. Casey, just to start out with, inventory came down a little bit in the quarter. You have a lot of variables to deal with the rest of the year. I wonder if you could just give us sort of your high-level overview of how you'll treat inventory in the rest of the year. And then I've got a follow-up.
Casey Eichler (CFO)
Yeah. As you know, over the last four to six quarters, we have brought inventory down and done a little bit more rigorous inventory management. And I think that's been helpful and a good discipline for the business. At this point, we've kind of been hovering roughly in this area.
It just kind of depends on the orders we see, what's getting shipped at beginning and ends of quarters. There really isn't much to read into that. It was a $1 million change. So it really wasn't that much of a change. Most of our inventory and product are in high runners. We don't feel a lot of exposure to that long-term. We're managing inventory and trying to make sure that we stay in the right place. It's a little tricky, like everything else right now with the visibility, because you don't want to get caught with, all of a sudden, an upturn and you don't have product. We're trying to balance that in an appropriate way. Okay. Great. For my apology, just on the subject of thermal cameras, I think we're seeing a real pull in the market immediately.
Charlie Anderson (Senior Research Analyst)
I'm sort of curious where things stand as far as your ability to serve that market. Is there a design activity that needs to take place, or are there any existing models in the market with your silicon that can serve that need, or is this more out in 2021 and beyond? Thanks.
Fermi Wang (President and CEO)
Like I said, I believe that multiple professional security camera customers are working on that. I believe you will see products coming out this year. Like you said, there's a high demand. I hope there's ongoing demand, but we should see. We do believe that there will be solutions out this year. However, I do believe that as soon as this trend started, when people realize that thermal can be easily integrated and the price comes down from the current level, that will enable totally different applications.
For example, I can imagine that even for the home security camera, at the right price, a thermal camera can be very helpful for doing access control. And also, in fact, that if the price and the power is right, that even for automotive business, you can use that to identify the evidence of either a person or animals that you want to avoid when you're driving. Those things become helpful. The biggest problem in the past was thermal sensor usually very expensive and not very easy to integrate. But with this new market opportunity, a lot of people are spending time finding ways to integrate with a security camera, as well as developing algorithms so far to do a sensor fusion between a thermal sensor and a CMOS sensor together.
And all of that effort will help the thermal sensor become more popular, in my opinion, for all of the applications that we're looking at right now.
Charlie Anderson (Senior Research Analyst)
Great. Thank you so much.
Operator (participant)
Thank you. Our next question comes from the line of Matt Ramsay from Cowen. Your question, please.
Matt Ramsay (Managing Director and Senior Semiconductor Analyst)
Thank you very much. Good afternoon, guys. Obviously, a lot of uncertainty out there, but it was nice to hear from Fermi that the ASIL products, it sounds like for the automotive industry, are ready to start rolling out. I just wonder if you might talk about programs that you've been working on in the automotive space that might have been waiting for ASIL-certified silicon and what your expectations are for growth of those products over the next 12-18 months. Thanks.
Fermi Wang (President and CEO)
Right. So for this ASIL chip, CV2FS and CV22FS, they are designed mainly for ADAS application.
Although they can be used for the ADAS + DMS or ADAS+ in-cabin monitoring, all of that, the combination with those three applications are the sweet spot for the design. And we are talking to multiple. In fact, we announced one Chinese OEM already planning to use CV2FS, and they will get assembled very soon. And plus, there are multiple customers evaluating CV2 and CV22FS for their new programs. But I think the biggest opportunity for us in this space is trying to enable ADAS application with the chip and with our software partners. We talked about HELLA in the past. There's a Korean StradVision in there. And there are other partners we're working with. So trying to make sure our partners can pull their software onto our platform, and we can sample this to tier ones on time.
I think this is the key execution we have to do in the next several months.
Matt Ramsay (Managing Director and Senior Semiconductor Analyst)
Got it. Thanks, and just a follow-up. I noticed that over the last, I don't know, 12 months or so, there's been a little bit more communication from the company about things that you're doing in the logistics and shipping, factory automation, those type markets with some contracts that you've won with some trucking companies for automating package delivery for, obviously, some things with your camera partners that may be in the Amazon Go store, and you branded some software development stuff with Amazon in their cloud to work on your software stacks. It seems like that's a push that your products overall might be well-suited for those markets as they develop and something you're investing in.
Just high-level thoughts, how important/big an opportunity that might be and timing of such an opportunity when it happens. Thanks.
Fermi Wang (President and CEO)
First of all, we are continuing to invest in those areas, and we didn't mention this time because I think COVID-19 probably clouded all the other discussions that we have, and this is, like I said before, it's our mid-term to long-term investment, and we are continuing to invest in this area because we think this is important for us, and also, we believe that's a big market opportunity in the mid- and long-term story, so while we continue to work with all of our partners you mentioned, what you just said, and also, we continue to do business development over Zoom meetings, over conference calls to talk to them, making sure we can support them properly, so all the projects are ongoing.
However, at the same time, we do see some slowdown in some projects because of COVID-19 and things. But we expect all the projects will be back to normal when the business reopens. Again, although we didn't talk much about that direction you mentioned, but that continues to be an area that we need to continue to invest and continue to work with our customers closely to introduce product.
Matt Ramsay (Managing Director and Senior Semiconductor Analyst)
Thank you very much, guys. Appreciate it.
Fermi Wang (President and CEO)
Thank you.
Operator (participant)
Thank you. Our final question for today comes from the line of Richard Shannon from Craig-Hallum. Your question, please.
Richard Shannon (Senior Research Analyst)
Thanks, guys. Just two quick questions for me. In bending your guidance for the July quarter, you talked about security being up. Curious if you can kind of give us a geographic breakdown, your expectations there, specifically thinking about China versus the rest of the world.
Fermi Wang (President and CEO)
We talk about China, basically, two customers continue to digest their inventory, so I think that's an indication that probably they are slowing slower revenue in Q2 forecast. Other areas, we still think it's normal from the professional security camera side, and we talk about consumer IP cam. So overall, from the China side, I have to say, with the geopolitical situation and the trade war between the U.S. and China, things become very, very uncertain. Even more uncertain than the pandemic, in my opinion, because there's just too many factors to consider at this time, so the only thing we are doing is continue talking to our customers on a regular basis. We're talking about weekly, sometimes daily basis, to understand their intention, understand the project, how much inventory they have, and what should we do to help them to support them. All of that is happening in the meantime.
But as I said, we have been saying many times that all of them are showing concerns, not particularly targeting Ambarella, but they are all showing concerns to continue to use the U.S. component. That I think is the biggest problem for all of us.
Richard Shannon (Senior Research Analyst)
Okay. That's helpful. Thanks for the detail for me. My follow-on question here, just quickly on your CV revenues for this year here. If you hit your kind of 10% of revenues goal here for this year, again, from a geographic point of view, how do you see that playing out here? Is it dominated or strong in China, or do you kind of see a balance throughout the world?
Fermi Wang (President and CEO)
I won't say it's dominant in China at all. I'd say it's very balanced. And I still think that we set the goal of 10% CV revenue.
I still think we have a very good chance to achieve that.
Richard Shannon (Senior Research Analyst)
Okay. Appreciate the detail. That's all from you guys.
Fermi Wang (President and CEO)
Thank you.
Casey Eichler (CFO)
Thank you.
Operator (participant)
Thank you. This does conclude 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)
Okay. Thank you all, and I am looking forward to talk to you next time. Thank you. Talk to you later. Bye. Thanks.
Operator (participant)
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.