Ambarella - Earnings Call - Q2 2021

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by and welcome to the Ambarella Second Quarter Fiscal Year 2021 Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session, and to ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is recorded, and if you're requiring further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Louis Gerhardy. Thank you, and please go ahead and start.

Louis Gerhardy (Head of Investor Relations)

Thank you, Chris, and good afternoon. Thank you for joining our Second Quarter Fiscal Year 2021 Financial Results Conference Call. Our speakers will be Dr. Fermi Wang, President and CEO, and Casey Eichler, CFO. The primary purpose of today's call is to provide you with information regarding the results for the second quarter of our fiscal year 2021. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We're under no obligation to update these statements.

These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we file with SEC, including the annual report on Form 10-K filed on March 27th, 2020, for fiscal year 2020, ending January 31st, 2020, and the Form 10-Q filed on June 8th for the first quarter of the fiscal year 2021, ending April 30th, 2020. Access to our second quarter fiscal 2021 results, press release, historical results, SEC filings, and a replay of today's call can be found on the investor relations portion of our website. With that, I'll turn the call over to Dr. Fermi Wang.

Fermi Wang (CEO)

Thank you, Louis, and good afternoon, everyone. First of all, I would like to provide an update on how Ambarella is responding to the health pandemic. We are focused on ensuring the health and safety of our employees, their families, and their communities, and to safely and effectively serve our global base of customers. The majority of our global workforce has returned to their offices, although our U.S. employees continue to work from home. Ambarella's workforce has always been globally distributed and collaborative, and we believe this culture and structure helped us adapt, remain highly engaged, and productive during this global health crisis. Our business is facing tremendous growth currents. On one hand, AI computer vision has become pervasive. We are embedding AI in all of our new products, and we have strong and growing evidence of market acceptance. On the other hand, the pandemic and geopolitical risks are high.

The economic constraints of the pandemic remain, and we are managing the operational challenges. Despite the challenges, in Q2, we delivered results slightly above the midpoint of the guidance we provided three months ago. Q2 revenue of $50.1 million was down 8% sequentially and down 11% versus the same period a year ago. A healthy customer and product mix, supported by strong operational execution, all contributed to gross margin above the high end of our long-term model. Our AI business continues to show growing signs of acceptance, with CV revenue now representing a mid- to high single-digit % of total Q2 revenue, and we are still confident that 10% of total revenue will be earned from CV products in fiscal year 2021. Our CV SoC commands an ASP more than 2X our non-CV ASP, and we are now seeing our overall blended ASP increase.

When revenue growth returns, we expect the higher gross profit dollars per CV unit to drive positive operating and the EPS leverage for shareholders. I will now talk about our markets and the customers. We have previously spoken about our ability to gain SoC share in the professional security camera market outside of China, and this continues to play out. With continued geopolitical uncertainty, we are now seeing additional opportunities to gain market share within China, in particular at the high end and the middle end of the market. Chinese IP camera makers have become concerned about the continuity of supply of existing solutions and have restarted evaluating camera designs based on Ambarella's solutions, including our CVflow AI SoCs.

Outside of China, we are continuing to see strong design momentum for our CV Flow SoCs in professional IP cameras in all geographies, and a very strong pipeline of new customer introductions planned over the next 12 months. During the quarter, leading Japanese camera supplier, i-PRO, previously Panasonic, continued to introduce more new models based on our CV Flow SoCs following their extensive product rollout in the previous quarter. This included a 4K weather-resistant outdoor dome network camera and a 4K outdoor bullet network camera, both based on Ambarella's CV22 SoCs. AI features include smart coding detection, recognition, and third-party application support. In August, Motorola Solutions announced the availability of Ambarella-based Avigilon H4 Thermal elevated temperature detection solution. It is a pre-screening solution that can be used to detect indications of elevated body temperature in a person.

Composed of an infrared spectrum thermal camera and featuring edge-based analytics, it provides a contactless alternative to traditional screening methods. In the consumer IP camera market, we have seen a rebound in orders from the major home monitor camera makers following initial push-outs of orders earlier in the quarter as a result of the impact of COVID-19. Our customers offering monitored security services have seen an increase in the number of installations in the second half of the quarter, while demand for our customers in self-installation market segment has now recovered. We are also winning new designs for our CV Flow SoCs in future generations of home monitoring cameras as customers demand advanced AI features such as smart person detection. In July, Taiwanese baby monitor and sleep analytics company Cubo Ai introduced its Cubo Ai + monitor based on our H22 SoC.

The camera's face detection technology alerts you if you recognize that your baby's mouth and nose are covered or if they are stuck when rolling over. During the quarter, we held two online webinars to promote our Janus Access Control reference platform, which enables contact-free access control of baby face recognition. The design has been developed jointly with ON Semiconductor and Lumentum, and it features our CV25 SoC to enable 3D sensing capability using a single camera. The two webinars hosted by Lumentum and IPVM, the leader in video surveillance reporting and research, attracted over 200 potential customers and partners, helping to secure our first design wins for the new platform. In the automotive market, we are seeing strong interest in our SoC solutions for a variety of new OEM applications, including front ADAS, Level 2+ autonomous vehicles, electronic mirrors, and car recorders applications.

In particular, our CV Flow AI SoC are winning designs based on their combination of low-power advanced microprocessing, AI processing performance, and ability to process multiple video streams. Since the beginning of the year, we have won new OEM design wins that we estimate will generate approximately $200 million in revenue over the lifetime of their production, typically between two and seven years. During the quarter, we won two designs for Japanese automaker Nissan. Chinese Tier one Longhorn introduced a pre-installed single-channel Wi-Fi DVR for Dongfeng Nissan passenger cars based on our A12A automotive SoC, while Tier 1 Hangsheng also introduced its dealer-fit dual-channel DVR for global Nissan models based on both our A12A and H22 SoCs. And during the quarter, Shanghai MaxiEye began shipping its front ADAS solution in Shaanxi Trucks, a leading commercial vehicle maker in China.

This is a new customer for MaxiEye, in addition to the Yutong Wit, which we announced on March 3rd. The ADAS system is based on Ambarella's CV28, CV Flow SoC, and our own MaxiEye's deep learning algorithms to achieve high accuracy visual perception of 3D scene modeling using monocular vision. In August, UK and European dash cam leader Nextbase launched its next generation 622GW 4K dash cam, the first dash cam to offer lifesaving emergency SOS alert capabilities. Based on Ambarella's H22 SoC, the dash cam provides 4K HD recording and image stabilization, while a real-time camera module also supports 1080p video. Also, during the quarter, Aoni introduced its dual-channel car recorder for leading e-commerce company, Sunvalley. The aftermarket car recorder features 4-megapixel 2-megapixel resolution recording, and it's based on our H22A automotive SoC.

As we mentioned in previous earnings calls, we are winning designs in the automotive fleet management designs, where our CVflow SoC provides the required AI performance for driver monitoring and front ADAS applications. During the quarter, Eyesight Technologies, an Israeli company providing driver and cabin monitoring systems and software, announced it has selected CV25 for its telematics fleet device. The device will implement Eyesight's FleetSense driver monitoring solution, with Eyesight's algorithm base being executed on Ambarella's CV25 CVflow SoC. The CV25 has been selected for its capability to run sophisticated AI algorithms at low power, best-in-class image processing, and ability to support additional applications such as video recording and streaming. In summary, we are addressing AI mega trends such as security, safety, and efficiency, all enabled by the integration of our leading video processor and our new computationally intense AI processor.

We continue to offer evidence of a broad and expanding customer adoption of SoCs. For example, during Q2, we had a record quarter of CV activity with more than 80 unique customers purchasing engineering parts, evaluation kits, and/or development boards, with activity roughly split between our security and automotive businesses. We are comfortably on track to achieve our guidance for professional security CV revenue on wave one to become mature this year, and we are on track to reach our similar wave two goal for the smart home market in calendar year 2021. Our wave three guidance for auto CV revenue to become mature in calendar year 2022 and 2023 is also on track. For example, during Q2, we had six automotive CV production customers. Our long-term automotive revenue funnel is just starting to build, with multiple projects either won or in a bidding pipeline.

For example, year to date, we have won automotive projects representing approximately $200 million in lifetime revenue. Some of the more significant programs start production in calendar year 2022 or calendar year 2023. And we will be providing further updates as the overall sales funnel develops. I would like to thank our employees worldwide for adapting to the changing conditions and delivering strong results. And I am thankful for the support of our customers, vendors, and shareholders during these volatile times. 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. Thank you.

Casey Eichler (CFO)

Thank you, Fermi. Good afternoon, everyone. Today, I'll review the financial highlights for the second quarter of fiscal year 2021 ending July 31st and provide a financial outlook for our third quarter ending October 31st. During the call, I will discuss non-GAAP results and ask that you refer to today's press release for 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. Our revenue of $50.1 million was slightly above the midpoint of our original guidance. This represents a decrease of 8% from Q1 and a decrease of 11% when compared to the same quarter in the prior year. In Q2, revenue declined sequentially in automotive and other markets, with the security camera business increasing in the low single digits sequentially. Professional security was down, and home security increased sequentially.

Non-GAAP gross margin for Q2 was 62.4% compared to 59.1% in the preceding quarter and was above the high end of our guidance, primarily due to a professional security concentration shift from China to other parts of Asia and North America. Margins were also supported by continued operational execution in a very difficult environment. Non-GAAP operating expense for the second quarter was 30.2 million compared to 31.9 million for the previous quarter. OpEx decreased and was below the low end of our guidance, primarily due to reduced employee expenses, lower depreciation from deferred capital expenditures, and a one-time foreign subsidy related to COVID-19 of $700,000. Other income of 1.3 million reflected the impact of lower interest rates. Non-GAAP net income for Q2 was 2.1 million, or $0.06 per share, compared to non-GAAP net income of 1.3 million, or $0.04 per share in the first quarter.

The second quarter, the non-GAAP earnings per share were based on 35.4 million diluted shares as compared to 35.2 million diluted shares in the prior quarter. The non-GAAP net income for the second quarter of fiscal year 2021 includes a change in the non-GAAP tax rate calculation to exclude losses from jurisdictions where there are no tax benefits associated. This was done to improve the alignment of non-GAAP income tax to the non-GAAP profit before tax. Accordingly, non-GAAP net income and non-GAAP earnings per share for the second quarter of fiscal year 2020 ended July 31st, 2019, have been adjusted for the change in non-GAAP income tax effect and presented consistently with the second quarter of fiscal year 2021 presentation. A reconciliation of GAAP to non-GAAP calculation is included in the financial statement portion of our press release.

Total headcount ended for the second quarter was 758, with about 81% of the employees dedicated to engineering. Approximately 69% of our total headcount is located in Asia. Cash and marketable securities were $410.7 million, down slightly from $411.3 million at the end of the first quarter. In Q2, we had negative operating cash flow of $2.4 million due primarily to increases in operating assets, while current liabilities remained relatively unchanged quarter over quarter. Total accounts receivable for the second quarter were $23.3 million, or 43 days sales outstanding. This compares to accounts receivable of $20.7 million, or 34 days sales outstanding at the end of the prior quarter. Net inventory at the end of the second quarter was $23.9 million compared to $22 million in the end of the previous quarter. Days of inventory increased to 109 days in Q2 from 91 days in Q1.

We did not purchase any shares of common stock in Q2. In May, Ambarella's board of directors approved an extension of the current $50 million repurchasing program for an additional 12 months ending June 30th, 2021. As of today, there remains $49 million available from the $50 million repurchase agreement authorized through June 30th, 2021. We had two 10% + customers in Q2. WT Microelectronics, a fulfillment partner serving multiple customers, came in at 56% of revenue, and Chicony, a Taiwanese ODM who manufactures for multiple customers, came in at 20%. I will now discuss the outlook for the third quarter of fiscal year 2021. Forecasting continues to be difficult, with geopolitical and pandemic risks continuing to create an environment of low visibility. It is a challenge for us and for our customers to confidently forecast government, business, and consumer spending for our products.

The rate of order push-out and cancellations were previously discussed in March 3rd and the June 2nd earnings call, has slowed, and design activity has begun to recover. However, not all customers' programs have returned to their pre-pandemic revenue trajectory, and global political tensions remain high with a wide variety of risks. In our prior earnings calls, we estimated two professional security camera customers in China had pulled in roughly $10 million of revenue from fiscal year 2021 to fiscal year 2020. We believe there has been some inventory reduction, but we continue to expect weak and/or volatile ordering patterns from these customers. During Q2, these two customers combined represented a mid-single-digit proportion of our total revenue.

Based on these factors and our best judgment at the current time, we expect total revenue for the third quarter ending October 31st, 2020, to be in the range of $52million-$56 million. We anticipate security camera revenue will be down sequentially, with automotive revenue flattish and other revenue expected to increase sequentially. We estimate Q3 non-GAAP gross margin to be between 60%-62% compared to the 62.4% in the second quarter, as customer, product mix, and operational control sustained gross margins in our long-term model range of 59%-62%. We expect non-GAAP OpEx in the third quarter to be between $31-$33 million due to continued lower travel, equipment, and employee expenses related to the current environment. Q3 other income should be modeled around $1.2 million. The Q3 non-GAAP tax rate should be modeled at approximately 15%.

We estimate our diluted share count for Q3 to be approximately 35.7 million shares. Ambarella will be participating in the Colliers Institutional Investor Virtual Conference on September 10th, the Deutsche Bank Virtual Conference on September 14th, and Jefferies Hong Kong Virtual Conference on September 15th and 16th. Please contact Louis for more details on these events. Thank you for joining us today. And with that, I'll turn the call back over to the operator for questions.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt Ramsay with Cowen Your line is now open.

Matt Ramsay (Corporate VP, Financial Strategy & Investor Relations)

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

Fermi Wang (CEO)

I think, first of all, we confirm that it's mid-single digits between Hikvision and Dahua. I think there are two factors around that. One is they are definitely building the safety stock last year. I think they are definitely drawing those safety stock at this point. Also, we talk about there is a possibility of they are looking for second source because they worry about the geopolitical situation. That's definitely two things happening. Also, in my script, I talk about another thing, which is not impacting our revenue yet. We talk about our CV4 SoC got more design-winning opportunities inside China also because of the geopolitical situation and our customers' current supplier might be facing some supply issues. That's why we start seeing some momentum in the design-winning activity in China. However, we do believe our technology, especially, has been proven outside China.

We don't have really a revenue concentration problem because most of our customers outside China, although there are some people in the others, but I don't think we have more than 10% customers in any accounts. Outside China, we still continue to believe we have the major market shares for both CV and non-CV professional IP camera supply. Inside China, I think that the mid-single-digit revenue number reflects the two factors I just talked about. At the same time, I believe that we will have more CV revenue inside China, more CV market share inside China in the near future.

Matt Ramsay (Corporate VP, Financial Strategy & Investor Relations)

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

Fermi Wang (CEO)

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

Matt Ramsay (Corporate VP, Financial Strategy & Investor Relations)

Great. Thanks, Fermi. And congrats on the progress.

Fermi Wang (CEO)

Thank you.

Operator (participant)

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

Tristan Gerra (Analyst)

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

Fermi Wang (CEO)

We haven't provided any guidance beyond Q3, but I will say that although pandemic, we start seeing lesser impact from pandemic in the coming quarters, but the impact is still there. However, even with that, we still believe the seasonality is there. Maybe not as dramatic as in the past years, but definitely, I think that our Q3 revenue will be higher than Q4 for sure. And also, let's assume that the pandemic impact will be really minimized at the beginning of next year. We should see a positive growth next year also. So although we cannot give you a really concrete guidance yet, but I think that's a trend we are talking about.

Tristan Gerra (Analyst)

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

Fermi Wang (CEO)

Yeah. Well, while there will be some growth in sales, marketing, and SG&A, really the majority of the growth in the OpEx area is in R&D. And that's not only continuing to grow the team and expand our effort from a headcount perspective, but it's also, although it's amortized, it's the increased tape-out costs, CAD tools, etc., that as we go down from the geometries that we're at now down to the 5 nanometer that Fermi talked about in our last call, those costs also increase as well. The leverage for the model that will offset that growth is really the two times ASP for CV versus non-CV.

While the margins are roughly the same or our margin target is roughly the same, that allows us to have an operating leverage that should get us back to the levels that we are at, 25% plus over the course of time as CV matures out in the model.

Tristan Gerra (Analyst)

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

Fermi Wang (CEO)

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

Tristan Gerra (Analyst)

Great. Thank you very much.

Fermi Wang (CEO)

Thank you.

Operator (participant)

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

Joseph Moore (Semiconductor Industry Analyst)

Thank you, Morgan Stanley. Thanks, guys. I wanted to come back to the China surveillance. I guess it seems to me really positive that those two customers are down around mid-single digit, and you're seeing design-win traction potentially there when you think about how that business used to be kind of a quarter of your business. So am I being too optimistic about this? And I guess, what is the alternative if HiSilicon is compromised in their ability to service those customers and you're starting to see some traction? I mean, shouldn't you start to see a pretty strong potential ramp? Is there a third competitor? Are they enabling new suppliers to sort of offload their U.S.? Just how should I think about where that mid-single digits can go?

Fermi Wang (CEO)

Yeah. Absolutely, Joe. First of all, I'm not sure that I caught your point right. To answer the question, from the CV point of view, from the high-end and middle-end products, outside of HiSilicon, we don't believe there is a competitor out there yet. However, the rumor is that a lot of customers, and also along with HiSilicon, they built a huge amount of inventory to try to ride out this uncertainty period. So I think that's one thing you need to consider. Then from the high-end and middle-end, I think that we are very strong. You can see the evidence on the outside China market. We are basically the leaders and probably have the biggest market share among all the possible customers. On the low-end side, there's a huge amount of Chinese Taiwanese companies trying to compete to sell $2-$4 of a CV chip.

That's on the low-end side. We do see a lot of competition. For the people who pay attention to the performance, power number, and the best image processing on the middle-end, high-end products, I think we are probably in a very good position.

Casey Eichler (CFO)

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

Fermi Wang (CEO)

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

Joseph Moore (Semiconductor Industry Analyst)

Great. Makes sense. And then, separate question, the thermal win that you talked about with Motorola, I guess we haven't seen you guys in a lot of these thermal cams before. It seems like a pretty big category given everything that's going on. Should we think of that as being a sizable opportunity? And just, are you seeing? Is there potential for more customers? Could that be a decent-sized business for you?

Fermi Wang (CEO)

We definitely believe that this is a market that we should target at, and we have worked with several customers, and Motorola being the number one out there to ship a product based on our solution. The way we're looking at this market is that a lot of thermal camera today is just building thermal information. But we do see a huge market pool for asking both CMOS image sensor and the thermal sensor combined in a camera so that they can overlay the temperature on the object and applying CV neural network algorithm on top of that. So you know when you see a high-temperature person, you know who they are and how to do a contact tracing.

I think this is a combination of AI plus thermal really helps us to help our customer to build much better contact tracing algorithm and the system that I think is definitely there's a big market for it.

Joseph Moore (Semiconductor Industry Analyst)

Great. Thank you.

Fermi Wang (CEO)

Thanks, Joe.

Matt Ramsay (Corporate VP, Financial Strategy & Investor Relations)

Thank you.

Operator (participant)

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

Ross Seymore (Managing Director and Senior Equity Analyst)

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

Yeah. We could by the end of the quarter see a little bit, but I think the guide to flat is reasonable, and to your point, somewhat pointing to where we are in our life cycle in the automotive business, that maybe differentiates us a little bit from others. The consumer business has been one that typically has grown pretty well in Q3 in front of the holiday season and end of the year, and you're right, we are seeing that. That business today is dominated by DJI and a whole series of products that they have that I think they're having pretty good success with, so we appreciate the relationship and look forward to them having a good season, but I think your assessment is fairly accurate around the consumer.

It is really more the normal seasonality along with maybe a few new product introductions that are looking pretty promising.

Thanks for that, Casey, and then I guess my longer-term question to create a bridge from the shorter to the longer. It's nice to see your gross margin upside so much. So any more color about what happened there? Not company-specific, customer-specific, but how was that so good in the quarter, and then you mentioned that CV2x, the ASP. Obviously, that'll have higher gross profit dollars. Any sort of at least directional commentary on what that does to the gross margin as well? Do CV gross margins rise versus the prior gen as well, or is it just the dollars we should think about?

Fermi Wang (CEO)

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

Joseph Moore (Semiconductor Industry Analyst)

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

Fermi Wang (CEO)

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

Ross Seymore (Managing Director and Senior Equity Analyst)

Perfect. Thank you.

Operator (participant)

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

Quinn Bolton (Managing Director and Equity Research)

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

Fermi Wang (CEO)

I would say that inside China, they have the biggest market share. However, I also want to point out the majority of them is on the low-end side. In fact, if you look at the distribution, more than half, a lot more than half is more on the low-end side, $2-$4 of ASP chip. However, the most profitable business for us is really on the middle and high-end side. That's where in the past, HiSilicon has the biggest market share in China. We have the second. Moving forward, I would say that give us some competitive edge to gain some market share on the high-end, middle-end market. However, I just want to point out one more time that although HiSilicon cannot ship after September 15th, there is a huge inventory that we believe has been built up for the current customers.

As well as that, for the low-end side, I think there are quite a few competitors out there competing purely on the price. So that we're going to see a price pressure on the low-end side. Outside China, we don't see a similar scenario. I think that we are supplying to all the non-Chinese customers from the low-end to high-end because they appreciate using the same system software across their platform. I think that's one of the key design requirements for almost all our non-Chinese customers.

Quinn Bolton (Managing Director and Equity Research)

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

Fermi Wang (CEO)

We don't have that number. It's hard for us to estimate how big it is. I really don't want to give you a wrong impression on that. But maybe we should do it. Hopefully, when our Chinese customer goes into the production with our CV solution, we can give you more visibility how we look at our CV revenue generated in China market next quarter. I think that's probably the best time for us to give you more clear indication on that time.

Quinn Bolton (Managing Director and Equity Research)

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

Fermi Wang (CEO)

First of all, in my script, I talk about sales funnel exercise inside the company. We are just doing what you're asking is really try to evaluate category. One is design win that already confirmed with the customer or design inside the pipeline that I think that already have RFQ or answering question or doing evaluation. That's a secondary category. The third category is the meaningful customer that we think in the long run we want to target and we think that the chance we can win. Among those three categories, we put the first and second category into our sales funnel and we start building models based on that. We are not ready to disclose the number, but I think in the near future, very near future, we should be able to talk about that number.

I would think that the $200 million number is just a part of it. It's not the majority of it.

Quinn Bolton (Managing Director and Equity Research)

Great. Okay. Thanks, Fermi. Appreciate it.

Fermi Wang (CEO)

Thank you.

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

Kevin Cassidy (Managing Director and Senior Analyst)

Yeah. Thanks for taking my question. Just around the professional surveillance market outside of China, you're seeing some weakness there. But do you think there's pent-up demand? And what kind of is your customers building up inventory? And with your inventory going up, are you holding inventory for them for when these products get deployed?

Fermi Wang (CEO)

Yes. Hey, Kevin. First of all, welcome back and nice to hear from you.

Kevin Cassidy (Managing Director and Senior Analyst)

Yeah. Thanks.

Fermi Wang (CEO)

From outside China, we don't see there's any inventory build-up. In fact, because of pandemic, people cut back so severely at the beginning of the quarter, and we start seeing people trying to pull in orders from our customers. So I would say there's really no inventory build-up anywhere outside China. And also, we continue to believe that the design momentum as well as that many customers will start introducing more and more CV models in the next 12 months will be helping us to build a significant business outside China. And also, we are very comfortable with our guidance. We talk about wave one, meaningful revenue from professional security camera by the end of the year. I think that's definitely there already. And we believe we can build up on that.

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

Kevin Cassidy (Managing Director and Senior Analyst)

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

Fermi Wang (CEO)

First of all, we already tape-out 5-nanometer test chip to Samsung, and we're expecting to receive the test chip maybe in two to three months, and then we can start testing it. We believe our first tape-out of 5-nanometer chip will be roughly the end of the year or early next year, and that's our target, and of course, that's definitely another CV chip for our key customers, and the power consumption saving for 5-nanometer is significant, and we believe, for example, that to do an 8K video, we can reach a two watts power, which is nobody there to talk about in the market. I don't think that's even reachable for any other people's design.

But we do believe that the potential 5-nanometer product can continue to help us to strengthen our position, not only just performance improvement, but also power improvement, power consumption improvement.

Kevin Cassidy (Managing Director and Senior Analyst)

Okay. Great. Thank you.

Operator (participant)

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

Tore Svanberg (Managing Director and Senior Semiconductor Analyst)

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

Fermi Wang (CEO)

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

Tore Svanberg (Managing Director and Senior Semiconductor Analyst)

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

Fermi Wang (CEO)

Thank you. So I really think that our competitor in China, meaning it's HiSilicon, they're moving very aggressively on the process node also. So however, like we said before, we believe our power consumption advantage comes from our design, not from the process node. Moving fast with process node just being defensive so that we don't lose those advantages because we fall behind on the process node.

So with the 5 nanometer, we believe we'll continue to be a leader on the performance per watt, as well as continue to provide differentiated features with potential more die size that we can play with providing extra functional features to our customers. And our competitive landscape from a security camera high-end side didn't change much. On the low-end side, I talked many times that there are many smaller companies that are trying to compete. On the automotive side, I think our main competitor is Intel/Mobileye, NVIDIA, and also that NXP and TI and the FPGA company, Xilinx. So I think they are our key competitors in this space right now. Very good. Thank you for the detail.

Operator (participant)

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

Suji DeSilva (Managing Director and Senior Research Analyst)

Hi, Fermi. Hi, Casey. So I'm trying to get a profile of the security camera business now versus maybe kind of prior peak. How far below prior peak is it, just to understand currently? And what's the mix now looking like versus typical professional, consumer? Just trying to understand if consumer can hold up here against professional's weak next quarter.

Fermi Wang (CEO)

Yeah. Again, on the professional side, the biggest dynamic change is over the last couple of years, we've added several customers, albeit not as big as those two major customers in China, Hanwha Techwin and others, that I think have helped give us a little more balance. But in the short term right now, as we referenced, with those two customers being a bigger part of revenue in the current situation, we have seen a decline in revenue over the last couple of quarters there. And as we look forward, what's the adoption of CV and others? That all remains to be seen. But for us, the mix has changed a little bit because we've gotten a broader acceptance across. And even in China, I think Fermi referenced several new customers, albeit smaller, that are starting to engage with our technology.

So we're going to, I think, continue to partner with everybody. The two customers in China are still very good partners of ours. And we have a relationship where we're trying to be as supportive as possible in any way we can. But that's really the change in the short-term dynamic. And the longer term is, again, something we'll talk to as it develops out.

Suji DeSilva (Managing Director and Senior Research Analyst)

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

Fermi Wang (CEO)

Maybe one thing I can say is in terms of design win activity or number of production. I think there are several in China. If you look at the $200 million revenue that design wins we got from the beginning of the year to now, the majority is outside of China. We get a lot of momentum in China with a smaller design. Also, we have momentum, for example, in the U.S. and in Japan that continue to help us to build up our pipelines.

Suji DeSilva (Managing Director and Senior Research Analyst)

Okay. Great. Thanks, guys.

Fermi Wang (CEO)

Thank you. Our next question comes from the line of Charlie Anderson with Colliers Securities. Your line is now open.

Charlie Anderson (SVP)

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

Fermi Wang (CEO)

Right. So first of all, compare $200 million to the previous year. Obviously, $200 million is higher. But like I said, in the near future, we're going to disclose our sales funnels for both design win and also design pipeline. And that will give you more indication of our progress we make with our customers in the automotive space. In terms of Hikvision Dahua, I think that a year ago, I would say easily they are probably 20% combined total business. So basically, that was probably, yeah, roughly $40 million last year or more than $45 million last year. And at the same time, I need to point out one more time that they put in some orders last year from this year to protect themselves from the potential geopolitical situation. Just a reminder.

Charlie Anderson (SVP)

Yep. Absolutely. And then for my follow-up, we noticed that FedEx has adopted the Daimler delivery van concept that your CV is involved in with COROS. I wonder if you could speak to the potential of that deal and then maybe just that end market broadly. And then I'm sort of curious if you could also talk about maybe the content for delivery vehicle as CV enables some of those use cases. Thanks.

Fermi Wang (CEO)

Right. So I think what you're referring to is really last week. I think FedEx was disclosed as a lead customer for COROS. And the two companies are working on a pilot program which has our CV2-based system for delivery vehicles and warehouse. We announced this at the CES, but we didn't mention FedEx because this is really our customers. This is really our customers mentioned this time, not us. But however, I think the significant part of this is really showing that our CV chip is mainly designed focused on ADAS and AD type of application. But in automotive, particularly for delivery truck, that also helps our customers to manage inventory as well as other possible applications. So in terms of total contents, we talk about there are two CV2 in there, and the content is roughly between $80-$100 a car.

However, I think that the production date is. I should not talk about production date because it really is our customer's information. But I really think that we'll leave that production date of this vehicle to our customer. But I definitely say that's part of our pipeline not pipeline. I should say our sales funnel numbers that we will disclose in the future.

Charlie Anderson (SVP)

Perfect. Thank you so much.

Fermi Wang (CEO)

You bet.

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

Richard Shannon (Senior Research Analyst)

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

Fermi Wang (CEO)

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

So I think that's two areas that we're working on.

Richard Shannon (Senior Research Analyst)

Okay. That is helpful. Thanks, Fermi. My second question is, and Fermi, I may have misheard your remarks, so set me straight if I'm wrong here. But I think you said you had a very good design engagement quarter with, I think, 80 engagements or so. I wonder if you can characterize that. And to the degree to which you're seeing it in kind of emerging markets like, say, robotics, can you give us a sense of where you're seeing all that activity and when you think that might come to fruition, particularly in markets like robotics?

Fermi Wang (CEO)

Right, so among the 80 companies, the majority of them are in our current market of security cameras as well as auto, but there are several of them that are working on the robotic applications, and the size of the market is still relatively small compared to our current market. However, again, I said it many times before, I truly believe 10 years down the road, robot with computer vision capability is going to be a major market for us, and we continue to invest on that. Although we don't have a visibility when this is going to be a huge market for us in terms of revenue, but that doesn't stop us from investing marketing and engineering resources on that so that we can continue to understand the requirements of the market, get updates about customers' applications.

I think that's definitely meaningful for us that we continue to do that.

Casey Eichler (CFO)

The other thing I would add to that is we're starting to see more and more activity in the access control area. And we have a couple of announcements that we highlight this quarter, but we've had engagements in the past too. And that's another, I think, interesting area as well.

Richard Shannon (Senior Research Analyst)

Okay. Appreciate all the detail. That's all from me, guys. Thank you.

Fermi Wang (CEO)

Thank you.

Operator (participant)

Thank you. And ladies and gentlemen, this does conclude today's question and answer session. I will now like to turn the call back to Dr. Fermi Wang for any closing remarks.

Fermi Wang (CEO)

Thank you. And thank you all for your attendance today. And looking forward to seeing you next time.

Operator (participant)

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