Ambarella - Earnings Call - Q3 2021

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Ambarella's third quarter fiscal year 2021 earnings call. At this time, all participant lines 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 will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your host, Louis Gerhardy, Corporate Development. Please go ahead.

Louis Gerhardy (VP of Corporate Development)

Thank you, Sarah, and good afternoon, everyone. Thank you for joining our third quarter fiscal year 2021 financial results conference call. Calling in today from different locations 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 our third quarter of our fiscal 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 based upon information available today and are subject to risks, uncertainties, and assumptions. Should any of these risks and uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We're under no obligation to update these statements.

These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we file with the SEC, including the annual report on Form 10-K filed on March 27, 2020, for fiscal year 2020 ending January 31, 2020, and the Form 10-Q filed on September 9, 2020, for the second quarter ending July 31, 2020, and Form 10-Q filed on June 8, 2020, for the first quarter of the fiscal year ending April 30, 2020. Access to our third quarter fiscal 2021 results press release, historical results, SEC filings, and a replay and prepared transcripts of today's call can be found on the investor relations portion of our website. With that, I'll turn the call over to Dr. Fermi Wang.

Fermi Wang (President and CEO)

Thank you, Louis. Good afternoon, everyone, and thank you for joining us this holiday shortened week. We are pleased to see our multi-year visual AI investment as a major force driving our accelerated business momentum, which is apparent in our Q3 results and outlook. Q3 revenue of $56.1 million was above the high end of our original guidance range. It led the way, but we also faced stronger-than-expected demand for video processors, despite the persistent geopolitical and public health risks. Gross margin of 62.7% was above the high end of our long-term model for the second consecutive quarter, reflecting a favorable customer mix and continued operational execution. CV revenue was slightly more than 10% of total revenue in Q3, and we continue to expect it to be 10% for the full year.

With an ASP about 2X our non-CV ASP, CV units were less than 4% of total units shipped, and an even smaller portion of the install base, highlighting the very early stage of this opportunity and the significant multi-year headroom for growth. We anticipate CV revenue will represent about 25% of our total revenue in fiscal year 2022, and we have a flattish outlook for video processors. The mega trends for security, safety, and automation are very favorable, and the pandemic appears to be accelerating this digital transformation. To support this anticipated growth, we continue to build our team globally, and we intend to further expand our presence around the world to support the rising interest in our CV SoCs from both existing and new markets. I will now talk about our markets and customers.

As we have previously mentioned, Chinese IP security camera makers have become concerned about the continuity of supply for existing Chinese suppliers and have been evaluating alternative camera designs on other solutions. Ambarella's CVflow AI SoC have won a number of design wins based on their AI performance, high-quality imaging, and low power. We have now received orders for shipment beginning in the fourth quarter of this year, including orders for our CVflow SoCs from Dahua, China's second largest security camera company. Outside of China, we are continuing to see customers introduce new IP security cameras based on our solution, including our CVflow AI SoC. During the quarter, Johnson Controls launched its new Tyco Multisensor camera, built on Ambarella's H22 SoC. The camera is equipped with four separate image sensors to provide up to 360-degree coverage via four separate non-stitched video streams.

Each of the four sensors is able to capture four-megapixel images, enabling the camera to cover an area which might normally require four separate high-definition video surveillance cameras, and Honeywell introduced its 60 Series IP camera, including five-megapixel indoor and outdoor bullet and outdoor speed dome models, and the two-megapixel outdoor speed dome models. Based on Ambarella's S5 SoC, the 60 Series offers increased resolution and provides fast notification and verification of potential threats and response, and FLIR introduced its Elara thermal camera for accurately measuring skin temperature at medium to high throughput entry controls. Based on Ambarella's CV22 AI SoC, it is equipped with on-edge intelligent face detection and issues on-screen prompts to individuals when they need to remove glasses, while also guiding them to the correct position for best measurement.

Panasonic continues to expand its portfolio of Ambarella-based models with the introduction of its vehicle capture camera, the WV-X5550. Based on Ambarella's CV22, the camera can capture clear images of vehicle occupants on one channel and license plates on another, even in challenging lighting environments, including nighttime. In the body-worn camera market, Panasonic introduced its BWC4000 camera. Based on Ambarella's CV25 SoC, the BWC4000 records 1080p video and has a 12-hour battery life. And also, during the quarter, Motorola introduced its VB400 body-worn camera, aimed at a security professional and based on Ambarella's low-power SoC. Integrated with a visual control center, the VB400 can augment fixed video deploying by displaying first-person perspective video from the body-worn camera alongside a fixed camera for superior situational awareness.

During the quarter, Comcast announced its new Xfinity Home offering called Self-Protection, designed for consumers who want high-quality security cameras but who may not need a professionally installed and monitored whole-home security system. The new Xfinity HD home security camera is powered by Ambarella's S3LM SoC and is built for both indoor and outdoor use. And this month, we introduced our CV28M camera SoC, the latest in our CVflow family, supporting the introduction of advanced AI features targeting a variety of cameras in new high-value markets. Its highly efficient AI processing and low power will enable a new class of smart IoT devices for applications including smart home security, retail monitoring, home robotics, and occupancy monitoring.

For new AI sensing applications like retail monitoring or occupancy monitoring, the SoC provides the AI performance to make all decisions in the camera, preserving privacy and avoiding heavy video processing running on back-end servers. In home robotics applications, the CV28M can be connected to a wide range of sensors such as visible structured light and time-of-flight to capture and then process the data required for navigation, and we are currently sampling CV28M to our customers. The CV28M software compatibility with existing CVflow families is allowing customers to enter production very quickly, and we have already received mass production orders for shipment beginning in Q1 next year. In the automotive market, we are continuing to make great progress as we promote our AI solutions for a variety of automotive applications, including ADAS and AD, for customers worldwide.

Today, we are announcing our total automotive revenue funnel for the first time, and we tend to update it at least once every year. Based on our best judgment, we currently estimate our automotive revenue funnel model is about $600 million, with a majority of CV for a variety of ADAS and AD applications. The auto funnel revenue runs through fiscal year 2027, with some of the more significant programs commencing production in calendar year 2022 or 2023. And this funnel covers business we have won as well as a pipeline of business we are currently competing for. We are seeing shipment of our CVflow-based ADAS solution for commercial vehicles in China continuing to ramp, with customers including Yutong buses, Shaanxi trucks, and Dongfeng trucks.

We are currently the market leader in the OEM car recorders category, with customers including Nissan, Honda, and Toyota in Japan, and Great Wall, Geely, and BYD in China. We are now seeing a recovery in orders for OEM car recorders in both regions, as car manufacturers begin to ramp production back up following the impact of the pandemic. And also, we are very pleased to announce that we have our first design wins for our CV2FS automotive functional safety SoCs, which we introduced during CES at the beginning of this year. These SoCs include the AI processing and the ASIL feature required for safety-critical ADAS applications. During the quarter, we signed a development agreement to supply our CV2FS SoC for Level 2+ ADAS system with an OEM manufacturer of electric vehicles.

In this application, the CV2FS provides the AI processing performance and flexibility to support a wide array of driver assistance capability to improve safety and convenience. Also, during the quarter, we signed a new development agreement with a tier-one supplier of electric vehicles for the European commercial vehicle market based on our CV2FS functional safety AI SOCs. The CV2FS was chosen for its ability to process video from multiple cameras and perform advanced AI processing to support features such as vulnerable road user detection and prediction. We are continuing to win new designs for fleet management solutions for commercial vehicles, as well as ride-sharing and taxi services. With 140 million commercial vehicles in the US and hundreds of millions worldwide, the ability to retrofit existing commercial vehicles with cutting-edge driver monitoring capabilities represents a major opportunity for Ambarella.

Our CVflow AI SoC has the required performance to support front ADAS application, active driver monitoring, and video recording and in November, Ambarella announced a joint reference design for automotive camera applications that simultaneously monitors drivers while capturing vehicle occupants for one-way video conferencing. The reference design uses software from Smart Eye, a world leader in developing AI-powered eye, mouth, and head tracking technology, and the image sensor from OmniVision Technologies. Ambarella's CV22AQ SoC simultaneously processes both RGB color image and IR, and runs Smart Eye's algorithms to analyze the driver's state and alert the vehicle to any unsafe indicator such as drowsiness. With the holiday season approaching, there have been a number of new consumer product introductions featuring Ambarella SoCs. During the quarter, DJI introduced its Pocket 2 handheld camera equipped with a three-axis motorized gimbal to stabilize movement.

The Pocket 2 is based on Ambarella's H22 SoC and shoots 4K p60 video, takes 64-megapixel photos, and includes an eight-time zoom capability. On November 4th, DJI introduced its Mini 2 Drone, the replacement for the popular Mavic Mini model. Featuring Ambarella's H22 SoC, the Mini 2 increases its maximum video resolution up to 4K at 30 frames per second, while also shooting 1080p video at up to 60 frames per second. Also, during the quarter, Insta360 introduced its ONE X2 Pocket camera. Based on Ambarella's H22 SoC, the ONE X2 includes Dual Lens 5.7K capture for high-resolution 360-degree images, H.265 encoding, AI-based editing, and advanced image stabilization. In summary, we have heard you have heard today more evidence on the growth and expanding adoption of our SoC in automotive and security camera. Security camera market. In the professional security camera market, our CV momentum is already strong.

To build as we have added new CV customers in Asia, and we expect to see CV become material in the whole security camera market over the next year. In auto, our CV traction is strong and a significant part of our expanding funnel. In addition, we continue to develop other IoT markets, including enterprise access control, smart locks, and counting occupancy sensors, and we look forward to providing you with updates on our progress. We are making significant progress in our multi-year transformation to a visual AI company, and the return on the investment is ramping. I'm proud and would like to thank and acknowledge all of our employees worldwide for their contribution to our leadership position in the market and for their execution in the face of the turbulent environment. I'm also thankful for the support of our customers, vendors, and shareholders during these times.

I will now turn the call 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 third quarter of fiscal year 2021, ended October 31st, and provide a financial outlook for our fourth quarter. During the quarter, I'll discuss non-GAAP results and ask you to refer to today's press release for a detailed reconciliation of GAAP to non-GAAP. For non-GAAP reporting, we have eliminated stock-based compensation expense adjusted for the impact of taxes. Our revenue of $56.1 million was above the high end of our original guidance. This represents an increase of 12% from Q2 and a decrease of 17% when compared to the same quarter of the prior year. In Q3, on a sequential basis, automotive revenue and other increased while security decreased.

Non-GAAP gross margin for Q3 was 62.4% compared to 62.7% compared to 62.4% in the preceding quarter and remained above the high end of our guidance, primarily due to customer mix as revenue from the two large professional security companies in China remained at low levels. Margins were also supported by continued operational execution in a challenging environment. Non-GAAP operating expense for the third quarter was $32.4 million compared to $30.2 million in the previous quarter. OPEX was slightly above the midpoint of our guidance range, and the consequence of the increase was primarily due to additional chip development expenses and higher employee-related costs outside of the US as normal activity resumed. Other income of $673,000 was due primarily to lower interest income as rates continued to remain low.

Non-GAAP net income for Q3 was $3.3 million or $0.09 per share compared to net income of $2.1 million or $0.06 per share in the second quarter. In this third quarter, the non-GAAP earnings per share was based on 35.8 million diluted shares as compared to 35.4 million in the prior quarter. Total headcount at the end of the third quarter was 766, with about 81% of employees in engineering. Approximately 69% of our total headcount is located in Asia. Cash and marketable securities were $423.6 million, up from $410.7 million at the end of the second quarter. In Q3, we had positive operating cash flow of $13.1 million. Total accounts receivable at the end of Q3 were $24.1 million or 39 days sales outstanding. This compares to $23.3 million or 42 days sales outstanding in the prior quarter.

Net inventory at the end of the quarter was $23.7 million compared to $23.9 million at the end of the previous quarter. Days of revenue increased to 102 days in Q3 from 109 days in Q2. We did not repurchase any shares in the third quarter. 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, there remained $49 million available for repurchase. We had two customers over 10% of revenue in Q3. WT Microelectronics, a fulfillment partner serving multiple customers, came in at 62% of revenue, and Chicony, a Taiwanese ODM who manufactures for multiple customers, came in at 18%. I will now discuss the outlook for Q4 FY 2021. Our visibility has improved, but we remain on guard for risk related to the pandemic and geopolitical factors.

Furthermore, as the semiconductor industry supply chain tightens, our operations teams remain vigilant in their efforts to manage manufacturing lead times and on-time deliveries. We have seen some customers request order pull-ins and orders placed within our lead times. CV design activity is at record highs. In our prior earnings calls, we estimated two professional security camera customers in China had pulled in $10 million of revenue into fiscal year 2021 from fiscal year 2020. In addition, revenue for processor inventory has been reduced. We anticipate orders to remain weak, offset by some degree of a ramp in computer vision SOC orders. During Q3, these two customers combined and remained in the mid-single digits as a percentage of revenue, which will likely be the trough for the foreseeable future.

Based on these factors and our best ability to estimate today, we anticipate total revenue for the fourth quarter ending January 31st, 2021, to be in the range of $56-$60 million. Automotive revenue is benefiting from an early CV ramp and a post-pandemic rebound. We anticipate auto revenue will be up at least 20% in both a sequential and a year-on-year comparison. We anticipate security camera revenue will be up in the low double digits sequentially. Following a normal seasonal pattern, other revenue is expected to decline sequentially. We anticipate Q4 non-GAAP gross margins to be between 59%-61% compared to 62.7% in the third quarter, with product and customer mix the primary driver for this change. We expect non-GAAP OPEX for the fourth quarter to be relatively flat in the range between $31-$33 million. Q4 other income should be modeled at $500,000.

The Q4 Non-GAAP tax rate should be modeled at approximately 10%. We anticipate our diluted shares for the fourth quarter to be approximately 36.3 million. Ambarella is registered to participate in virtual conferences in Q4, including Wells Fargo, Imperial Capital, UBS, Barclays, MKM, and Needham. Ambarella will also be hosting virtual CES meetings between January 11th and January 22nd. Please contact Louis for more details on these events. With that, I'd like to turn it over to questions. Operator?

Operator (participant)

Thank you. As a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Joe Moore with Morgan Stanley. Your line is now open.

Joe Moore (Managing Director)

Great. Thank you. Congratulations on the quarter. I wonder if you could talk a little bit more about the funnel, the $600 million, I believe is the number. Can you compare that to the $200 million, which was sort of secured design wins from a quarter ago? How much of that $600 million is secured? And then I assume that as you move forward, there's still the opportunity to add incremental revenues to that funnel in the timeframe that you suggested.

Casey Eichler (CFO)

Yeah. Thanks, Joe. You're right. What we announced last quarter represented the design wins for the first six months of the year. What we're talking about today is the $600 million is for the design wins that are won and also in our pipeline. So based on what we have today and in our pipeline, we have $600 million of opportunity today.

Now, to your point, that doesn't mean that we can't continue to add to that. We also give that a haircut, as you might imagine, related to what the customers think their revenue is going to be and also the probability of timing to market. So I think it's a relatively reasonable and conservative look at it, and there is, to your point, an opportunity to add to that.

Joe Moore (Managing Director)

Okay. Great. And I assume that's mostly computer vision. I mean, is there a video processing component to that?

Casey Eichler (CFO)

There is, but there is also a healthy component for computer vision as well. But there is some vision-based system as well.

Joe Moore (Managing Director)

Great. Thank you very much.

Casey Eichler (CFO)

You bet. Thank you.

Louis Gerhardy (VP of Corporate Development)

Let me add one more thing. Hey, Joe, I think in my script, I do mention that majority of that $600 million are from CV.

Joe Moore (Managing Director)

Okay. Thank you.

Operator (participant)

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

Tristan Gerra (Senior Research Analyst)

Hi. Looking at the design wins that you've announced in the security camera business and at the same time your two large customers not reordering, is there an inflection point that you're expecting in terms of new orders coming from those customers? And is that when you expect the inventory rebuild to happen?

Fermi Wang (President and CEO)

Well, first of all, I think that we do see that both customers are using their inventory right now. And also, we start seeing small orders coming from both of them. So that's why Casey just mentioned that we think we're in the trough of the revenue for those two companies at this point.

However, moving forward, I think that I expect that Dahua will be strong on the computer vision, and video processor business will continue to be just flattish. But Hikvision is different, though. Hikvision, we haven't announced any design win with CV design win with Hikvision yet. So, I would say we should treat those two companies separately. But we do believe that, first, the inventory is gradually being worn down. Two, the CV ramp from Dahua will be important for us. And three, in the future, we're going to continue to work with Hikvision to see where we have opportunity to work with them on the computer vision technologies.

Tristan Gerra (Senior Research Analyst)

Okay. Great. And then a quick follow-up, which is, as you expect your CV business to ramp meaningfully over the next fiscal year, I understand the higher ASPs.

Is there any impact, or how should we look at the trajectory of OPEX as a result?

Casey Eichler (CFO)

Yeah. I think the modeling for CV we talked about is exactly what you just mentioned, and that is roughly two times the ASP, a similar gross margin profile, but obviously operating leverage as we're able to now leverage the $450 million that we've already invested in CV, along with taking our technology more broadly, as Fermi mentioned, to more and more customers. So I think the CV leverage on an operating basis and on a top-line basis is, as you described it.

Tristan Gerra (Senior Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Matt Ramsay with Cowen. Your line is now open.

Matt Ramsay (Analyst)

Thank you very much. Good afternoon, everybody. Fermi, I wanted to ask, and I guess Casey, feel free to chime in here too, something from the prepared script.

You reiterated CV as 10% of revenue targeted for this year, which, I don't know, $22-$23 million, I guess, based on the guidance for the fiscal fourth quarter. And then I just want to make sure that I heard this correctly, that keeping camera sort of vision camera revenue flat, you expect 25% CV revenue contribution next year, which I guess implies a tripling of the CV revenue. Is that—I don't know. I'm doing math here in the spreadsheet and probably screwing it up, but I just wanted to see if that's an accurate portrayal of what you guys said. Thanks.

Fermi Wang (President and CEO)

Yeah. I think that everything you say is correct, except one thing. That we continue to expect 10% of CV revenue this year. And also, we provide the guidance that we expect CV revenue will be 25% of total revenue next year.

But that's 2.5x, not 3x, as you described.

Matt Ramsay (Analyst)

Got it. Thanks, Fermi. Just following up on, I think, Joe's question and maybe asking in a different way on the auto pipeline number. I just want to really get precise about. There was a $200 million in one business that you talked about last quarter. And just within that $600 million, what's the progression over the last, I guess, three months of the business one and the same metric that you gave us last time? I understand that you'll be giving the full pipeline number going forward, but just since you gave us one data point, maybe you could give us the second one so we can try to draw a line. Thanks.

Fermi Wang (President and CEO)

Well, based on our current announcement, you see that we signed at least two new design wins this quarter, right?

One is that functional safety chip for the ADAS, for the Level 2+ ADAS application. The other one is for the electronic mirror. So with these two, you should assume that we'll definitely add more to the pipeline just this quarter. And we didn't disclose because going through this exercise is time-consuming to be accurate. And we plan to continue to update these fundamental numbers at least once a year so that we continue to provide you a data point. But also, every quarter, we're going to continue to talk about the design win we get, which we will not disclose the amount, but that will give you some indication how we continue to add to our funnel every quarter.

Matt Ramsay (Analyst)

Got it. Thank you. Just one last one for me, and I'll get out of the way.

I guess if you are talking about forecasting CV revenue and the remainder of the business for fiscal 2022, what assumptions are you making at Hikvision and Dahua about their ability to secure HiSilicon chips and what that might mean for your business? Or are you assuming that things stay steady state and whatever changes happen there may come in the future? Thank you.

Fermi Wang (President and CEO)

I think my assumption for these two customers are different. My assumption is we're going to ramp up with Dahua on CV chip, which that we already talked about in this script. In terms of Hikvision, in our current revenue forecast, does not include any CV revenue from them with this version. And that's what we are working on. Hopefully, that we can convince them to use our CV technology in the future.

Matt Ramsay (Analyst)

Thanks very much, Fermi. Appreciate it.

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)

Yes. Thank you. And congratulations on the solid results. First of all, it sounds like you're assuming the video processor business to be flat in fiscal 2022. Is that just because of CV cannibalizing, or are you just being a bit conservative there too given the geopolitical tension still?

Fermi Wang (President and CEO)

Yeah. Well, go ahead. Casey, go ahead.

Casey Eichler (CFO)

I was just going to say, I mean, certainly, we always try to be conservative in the way we look at business going forward. We'll learn over the next couple of years how much is pure growth and how much of it is replacement. There'll be an element of both, but I don't know that we have enough information to date to make that determination.

Clearly, after you get to that time point, it's going to be more and more cannibalization because we're not doing new video-only processors for people to continue to extend. So they're going to have to either continue to use the products we have or, over time, go to CV.

Tore Svanberg (Managing Director)

Very good.

Fermi Wang (President and CEO)

Let me just follow up.

Tore Svanberg (Managing Director)

Yeah. Go ahead, Fermi. Go ahead.

Fermi Wang (President and CEO)

Sorry. One more thing. I believe when we talked to other customers earlier, I think all of them are planning to use CV to gradually replace their video processor technology because everybody views that although it's two different technologies, but it's a continuation of the product line. All the video processor markets will be replaced by CV in a span of three to five, maybe even longer years. But eventually, CV camera will replace that.

In my opinion, I really think that in three years, 50% of video processor market will convert to be CV market, which is great for us because it not only helps giving us a chance to grab more new market share, but also increase the ASPs.

Tore Svanberg (Managing Director)

Yeah. That's great perspective. And I had a question on CV28M. It sounds like this is more of a consumer product for you. And I'm just wondering if this is something that goes after higher unit volumes. And if so, what implications does that have for ASPs and potentially margins? Thank you.

Fermi Wang (President and CEO)

Right. So first of all, you're absolutely right. We talked about in the past, we want to build a complete family of a CV chip based on CVflow architecture.

CV 28, this new member is redesigned to target at a high-value market, which is also very sensitive to the ASP and the cost. But at the same time, I want to point out the 2x ASP versus our video processor technology is still applied to CV 28 because our low-end video processor price is very low also. That's the first thing. In terms of gross margin, I will say that this chip's gross margin will be as good or maybe better than the video processor equivalent video processor technology, but however, it's not going to be as high as our corporate gross margin. So that's the balance of this too. When you go to a higher-value market, you are competing a bit on the pricing side. So CV 28 is designed for that.

Tore Svanberg (Managing Director)

That makes sense. Thank you again, and congratulations.

Fermi Wang (President and CEO)

Thanks. Thank you.

Operator (participant)

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

Quinn Bolton (Analyst)

Hey, guys. Congratulations. Just wanted to follow up on the auto funnel. First, just a clarification. Did you say that was extended through fiscal 2027? I'm just trying to get the date right.

Casey Eichler (CFO)

Yeah. That's correct. I thought I said it was fiscal 2026. It's fiscal 2027. It's a total of six years.

Quinn Bolton (Analyst)

Okay. Okay. Six years. And obviously, can you give us any sort of shape of that funnel? It sounded like you said the bigger ramps kind of happen in calendar 2022, 2023. I would assume sitting where you are today, there may not be a lot of business that's being added at this point for, say, 2025.

So should we think about it that you ramp up to a steady state level by, say, 2023 with this current funnel, and then it would be sort of flattish for several years? Or can you give us any idea how you're viewing that shape? Obviously, anything you add to the funnel in the future will add to this, but just kind of wondering what the shape of that funnel looks like.

Louis Gerhardy (VP of Corporate Development)

Hey, Quinn. This is Louis.

Casey Eichler (CFO)

Go ahead, Louis.

Louis Gerhardy (VP of Corporate Development)

Yeah. You're right about the shape. So there's some large programs that start to go into production in calendar year 2022 and calendar year 2023. And then it levels out in terms of the annual contribution. But over time, we'd expect those numbers to change as we win new programs or bid on new programs.

Quinn Bolton (Analyst)

Got it. Understood. Okay. Thanks.

And then, Casey, I guess maybe I missed something on the gross margin guidance. It sounds like Hikvision and Dahua or maybe just more broadly, China Professional is going to remain at a fairly small percentage of revenue in the January quarter, yet margins are going to be down nearly 2-400 basis points. And so, it doesn't feel like you have an adverse mixture back to China Professional security. So, what's the cause for the margins to come back down in the January quarter?

Casey Eichler (CFO)

It's an overall general mix between several different customers, but there is a fair amount of revenue that we will start to see, I think, in Q4 from those two customers. Some of it is vision-based, and as Fermi just mentioned, some of it being CV-based around Dahua.

And I think that will be a nice contribution to the top line, but it'll also put pressure. It's not the only factor, but it certainly is one of them. As I mentioned, the consumer side of the business is always down this quarter. That's a seasonal thing. So that changes the mix, not only customer but also product mix. And so there's more than just one thing going on, but there will be some recovery in that revenue. And again, as I mentioned, I think while the vision will be relatively stable or not have as much growth, we will see that CV start to come in in Q4, and that while it helps revenue, will also have some margin impact.

Quinn Bolton (Analyst)

Got it. Great. I guess with that vision business maybe starting to come back a little bit, can we assume now that you're largely through that $10 million inventory purge, or do you think that that $10 million, that some of that is still burning off in the January quarter?

Fermi Wang (President and CEO)

I can just affirm, yeah. I think we continue to see that they are burning through this inventory, but I don't believe we have seen the end of it. Among all the product lines or video processor product line, Hikvision and Dahua ordering from us, we're only seeing several items coming back for new orders. But remaining still, we haven't seen many orders yet. So I think that's a sign for two things. One is they continue to burn through the inventory, but for some certain product line, the burn through is done. So we start seeing new orders.

So that's why we are saying in the next few quarters, we're going to continue to monitor how they're going to come back. But however, at the same time, I also need to mention that I also mentioned that Dahua CV will start ramping in Q4. That will help us on the revenue side both put some pressure on the margin side.

Quinn Bolton (Analyst)

Got it. Okay. Thank you.

Operator (participant)

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

Kevin Cassidy (Managing Director)

Yeah. Thanks. And congratulations on the great results. As you're introducing the new CV devices, the CV28 in particular now, now that all of your customers have done some CV designs, is there a change in the time to market from the time you introduce a product to the time your customer comes out with the product? Yeah.

Fermi Wang (President and CEO)

Hey, Kevin, this is Fermi. I think you're absolutely right. Our overall CV family chips from CV2 to CV25 to CV28, they share the same software SDK. So as soon as the CV28, the chip, the hardware was sent to a customer, people can port the existing SDK that they already have onto CV28. And that's why we think the time to market is much, much faster. And in my script, I talk about that we expect to see we already received orders in Q1 next year, and we expect we're going to ship on time.

Kevin Cassidy (Managing Director)

Okay. Great. Yeah. And on the OPEX side, it looks like it's under control, very flat quarter over quarter, even with 5 nanometers products coming in the pipeline.

Are there any foreseen expenses coming up, or should we expect this through fiscal year 2022 to be kind of tight controlled over OpEx?

Casey Eichler (CFO)

Yeah. I think you're going to continue to see the drivers in OpEx be two things. One is we're going to continue to be hiring not only in engineering, but we're starting to do some hiring outside of that as we start to really deeply pursue some of these markets that we haven't been in in the past. The second thing is, although there can be a little bit of lumpiness to it, there will be a build in the cost of designing, as you mentioned, into lower technologies, not only the CAD tools and foundry costs, but the overall cost of being on the front edge of this technology will continue to be a driver.

Generally, that gets smoothed a little bit the way we treat that over the quarters, but you can, as projects start and stop, have a certain amount of lumpiness to it. But I think those will really be the two drivers. The rest of the business is in pretty good shape.

Kevin Cassidy (Managing Director)

Okay. Great. Congratulations again.

Casey Eichler (CFO)

Appreciate it.

Fermi Wang (President and CEO)

Thank you.

Operator (participant)

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

Charlie Anderson (Analyst)

Yeah. Thanks for taking my questions, and my congrats on a strong quarter and outlook. I wanted to start with some of the opportunities in automotive. I think your software partner was acquired, in Europe was acquired by an automaker. I'm sort of curious how that maybe changes the complexion over there.

And then I think there's been some reporting on potentially some mandates or some goals in China around partial driving and self-driving. I wonder if you're seeing that manifest itself in any of the design activity in terms of some of the push over there. And then I've got to follow up.

Fermi Wang (President and CEO)

Yeah. Thank you. So first of all, Hella, yes, they are a very important software partner for us. I think they were acquired by VW. And the significant change for us is the following. First of all, I think that at the VW side, we have a brand in there now. I think it's definitely helping us to have better VW opportunities in the business there. At the same time, I also realized that we need to have a new software partner for other businesses.

And that definitely will be very. We spent a lot of time developing new software that we really understand what we need. That's a. We're going to continue to work on. In terms of your second question, sorry, your second question. Hey, Charlie, can you remind me your second question?

Charlie Anderson (Analyst)

Oh, yeah. Sorry. It was about, I know in China, it seems like there's a push toward more partial autonomy and full autonomy, some mandates potentially. I wonder if you're seeing any of that manifest itself in the design activity and some of the planning.

Fermi Wang (President and CEO)

Yeah. We do see that. And first of all, I think that for the commercial vehicle trucks and the buses, in fact, that reflects some of the strong revenue in China for our ADAS market. So I really think that that's one market that we start seeing drivers from the government regulation point of view.

And that, I think, will continue. We haven't seen any regulation requirements for super vehicles. So if we hear anything, we'll provide updates.

Casey Eichler (CFO)

So as Louis mentioned, we're in two different sites. It seems like we're getting a little feedback for some reason at this point, but we'll see what we can do.

Charlie Anderson (Analyst)

Okay. Great. And then I just had a quick follow-up. I was curious if you could maybe update us on the HiSilicon situation. I know last call you talked about a lot of inventory being out there. But just curious how that's looking in terms of some of the opportunities just to capture some of those sockets. Thanks.

Fermi Wang (President and CEO)

Right. So in the last few months, we continue to monitor the situation. We believe the situation is just like what we said last time.

There's still plenty of inventory out there, but many stay in the big customers. I think, for example, Hikvision, I believe we don't have any proof, but we do believe Hikvision has a lot of inventory of HiSilicon chips so they can continue to ship, but however, for other smaller HiSilicon customers, I think they are looking for new suppliers, and that's why we are seeing opportunities that we can win, and we mentioned that we win a handful of Chinese professional security camera customers in the last three months, including Dahua, and also, we believe they're going to gradually ramp up the production with us starting Q4 and moving to next year, and also, we also see in other video markets, we see a lot of customers are looking for solutions, and we definitely believe we have an opportunity and a technology that we can serve them.

Charlie Anderson (Analyst)

Great. Thank you.

Operator (participant)

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

Ross Seymore (Managing Director)

Hi guys. Congrats on the strong results and guide. I guess for my first question, just another clarification on the automotive funnel side of things. And forgive me if I'm cutting this a little too finely, but was that $600 million a combination of both existing design wins? And then I thought, Fermi, you said designs you're competing for. Is that kind of a SAM analysis? Are those design wins that you're competing for that you think you're going to get? I just wanted to clarify how kind of concrete those design wins are.

Louis Gerhardy (VP of Corporate Development)

Hey, Ross, this is Louis. For that $600 million funnel, as Fermi said, a majority think of 70% as business that's won.

That business has been discounted based on our confidence in the revenue forecast that's been given to us at the time we won the business. The other $200 million are opportunities that we're bidding on with two discount factors. Discount factor one is the probability of winning that business. Discount factor two is the confidence in the revenue forecast that's been provided to us at the time we're bidding on the program. It's a six-year funnel. Again, as Fermi said, a majority of that business is won.

Ross Seymore (Managing Director)

So, would another way to say, with the $200 million you gave last quarter that at that point you had year to date, you've pretty much added another $200 million till today. Then the final $200 million is kind of the part that you hope to win?

Casey Eichler (CFO)

No. Last quarter, Ross, what we provided was $200 million of business won in the first six months of the year. So there's an additional $200 million on that that we had won before that period of time or more recently.

Ross Seymore (Managing Director)

Got it. Okay. Thanks for the clarification on that. Then maybe one for Casey. A lot of good questions have been asked and answered already, but you gave great granularity in the sequential guide by your three primary segments, but you just gave directional guide of what they actually were in the prior quarter. So, whether it was for the fiscal third quarter or if you wanted to do it for the entirety of the fiscal year, how do your revenues split between the IP security, automotive, and then consumer and other buckets? So, we just have a baseline to work these percentages off of going forward.

Casey Eichler (CFO)

Yeah. For the full year, we've said and it remains true that the auto side of the business is probably going to be between 15%-20% of total revenue, that the consumer business was probably going to be close to 20% of total revenue, and then the balance would be IP security. So, we were saying in the past kind of 2020, but it's changed a little bit, obviously, of course, but not a lot.

Ross Seymore (Managing Director)

And then as you go into the fourth quarter, this goes back to the gross margin question that I think either Tore or Quinn asked about. The revenue mix side of the equation, I get that it sounds like Dahua and Hikvision are going to be a little bit more of the business, still mid-single digits, maybe a little bit more. What is the other mix-related headwind?

Are there positives in the consumer segment that were big tailwinds in the fiscal third quarter that then seasonally go away, or is there something else going on?

Casey Eichler (CFO)

Like I say, it is a mix. The only correction I would make is that for the security camera revenue, we said that it will be for the fourth quarter, we said that it will be up in the low double digits sequentially. So it will be up. And with Dahua that we've talked about and Fermi's talked about, as well as some HiSilicon, that's part of it, but not all of it, but that's part of the mix.

Ross Seymore (Managing Director)

Got it. Perfect. Thanks, guys. And congrats again.

Casey Eichler (CFO)

You bet.

Fermi Wang (President and CEO)

Thank you.

Operator (participant)

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

Andrew Buscaglia (Analyst)

Good evening, guys. I wanted to follow up on you talked about the computer vision as a percentage of sales around 25% next year. So that's more. I was modeling that out, and I came down just under 20%. So I'm wondering, it seems like you guys are pretty optimistic here, and I'm wondering if you could provide maybe some sort of breakdown of what that comprises of next year. I imagine it's mostly professional security, but do you have any other color you can add as to how the makeup of that 25%?

Fermi Wang (President and CEO)

Yes. First of all, I think you're right. A big part of that 25% is from professional security camera. However, we also mentioned that we believe we're going to our consumer, sorry, our home security camera business will ramp up with the CV technology, CV product next year.

We also mentioned that we think it could be material next year from a revenue point of view. Also, more importantly, on the automotive side, I think there are some hidden CV revenue opportunities that we can ramp up, particularly in China, commercial vehicle and also the buses or outside China, we talk about fleet management. All the fleet management customers outside China are using our CV chip for ADAS as well as the driver monitor applications. We also believe that this is a ramp-up. I think they are all the potential business opportunities for us for fiscal year 2022. I think you're absolutely right that the professional security camera will be the biggest part of it.

Andrew Buscaglia (Analyst)

Presumably, though, you're talking pretty positively on what's going on in automotive too with that funnel.

So presumably, the real driver for computer vision even comes beyond that calendar year 2022 and beyond. I would think that would be an even bigger driver for that computer vision segment.

Fermi Wang (President and CEO)

I agree with you on that.

Andrew Buscaglia (Analyst)

Yeah. Okay. Interesting. And then maybe last one, Fermi, you had some interesting commentary around the security market over three to five years adopting computer vision. Are you essentially saying products that you see being sold three to five years from now will have to, I guess what's prompting people to upgrade to these new CV capabilities? What are the drivers behind that? Because that could be a pretty big upgrade cycle.

Fermi Wang (President and CEO)

Well, for professional security camera, the biggest driver is the following. In the past, all of the computer vision is done on the server side.

That requires you transmit all the video to the server and store there, and you do the video analytics or computer vision offline, which is okay for maybe a million units of camera, but if you want to scale to millions and millions, tens of millions, or hundreds of millions of camera, that adds to the huge pressure not only on the bandwidth infrastructure but also storage cost. When we talk to customers, they all agree the only solution for them is to apply computer vision on the edge. They only analyze the data back to the server and only apply some analytics on video data on the cloud when it's required. That will dramatically reduce the requirement on transmitting the video and the server storage and server computation. That's a huge investment saving for our customer.

That's why we believe that we're going to continue to see the trend. On the other side, however, the difficult part is that the current CV camera is a lot more expensive than video processor camera. But however, that's why I say in three to five years, the economy will bring down the cost of the camera. We'll make this more attractive for our customer to replace them. So there's a huge driver purely based on the technology reason, but I think the financial reason will come in three to five years to make this happen. Our internal forecast, we believe that our CV revenue will continue to go up at a big percentage just because of that. And also in the auto side, we also see the same thing.

In the future, all of the new design wins that we are winning, majority will not be CV-related because even you don't need a CV in a car today, but people want to put CV processing in there just so they can have a future upgrade. And just the future-proof criteria really help us to design a lot of CV chips for the automotive opportunities.

Andrew Buscaglia (Analyst)

Got it. All right. Thanks for the color.

Operator (participant)

Thank you. Our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is now open.

Vivek Arya (Managing Director)

Thanks for taking my question and congratulations on the strong growth. Fermi, I had a few conceptual questions. First one, when do you think automotive CV becomes more than 10% of your sales? Is that something that can happen in 2022, 2023?

Just conceptually, when should we expect automotive CV to be more than 10% of your sales?

Casey Eichler (CFO)

You know what? While we're trying to get some additional color to the revenue and certainly the emergence of some of these markets, it is early times, as Fermi, I think, mentioned. And so we try to guide as best we can quarter by quarter. I don't know that today we're ready to try to commit to timelines. Conceptually, we think that CV is going to continue to drive all of our revenue platforms. And so we're very bullish. We're seeing the development activity grow strong. That's auto included. But how that plays out in these early times over the next few quarters, I think we'll be able to comment on that more broadly as time goes on. But today, I think what we've done is try to characterize it as best we can.

Vivek Arya (Managing Director)

I see. Okay. And for my follow-up, in the wins that you're having in automotive with CV, how many of them are exclusive where you are the only CV processor in the car, where you are one of many processors? And if it is the latter, are there certain applications where you have tended to do better? Are there certain applications where the customer is preferring to go with the competitor? So it's more a technology question as to whether you're exclusive or not. And what are applications where you tend to do better versus the competition?

Fermi Wang (President and CEO)

Maybe it's easier to look at from different automotive application point of view. From e-mirrors or ADAS or recorders, when they use a CV chip, usually there's only one processor in those applications. So if we are chosen, then we are the only CV processor in that device by definition.

But however, like you said, there's other applications like Level 2+, and people are using multiple chips to do CV. In some of the applications, we are the only one to provide multiple chips into the application. But there are cases also that there are some functions being done by other chips, and we implement other portions of applications. It all depends on the customer's preference as well as the current market situation. So, for example, for the Level 2+, Mobileye is dominating the market. So you can imagine at Level 2+, there are some customers say, "Okay, I don't want to change my front camera, which is Mobileye," but for other camera, they can use other solutions, which we can definitely be considered, and we want some of the design wins like that.

Vivek Arya (Managing Director)

Got it. Just lastly, how should we think about operating expense growth as you're starting to grow your top line at a faster pace in these emerging markets? I understand that you have done a lot of upfront R&D, but is there a simplistic model to drive your operating expense growth from here? Will it grow at half the pace of sales growth? Or what is the right way to think about your OPEX growth for the next one to three years? Thank you.

Casey Eichler (CFO)

I think definitely you're going to see, as I mentioned, leverage coming in the model. As I mentioned earlier, that's partly because of the CV and the two times ASPs, which drives the top line. But you're not going to see that get taken out in the operating expenses.

You're going to see our operating margin growth continue over the next couple of quarters or next couple of years even. But I think you're going to see the leverage in the margins, sorry, after the margin line, come back into the model. We were doing operating margins at 20%-25% historically, and I don't think there's any reason over the next year or two you don't see that come back into that target range.

Vivek Arya (Managing Director)

Got it. Thanks very much.

Operator (participant)

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

Suji Desilva (Managing Director and Senior Research Analyst)

Hi, Fermi. Hi, Casey. Looking past the January quarter and the growth there, is there some element of seasonality looking into the fiscal first quarter 2022, or are your program ramps, you think, and maybe restocking perhaps going to carry? What's the dynamic looking into the next six months?

Casey Eichler (CFO)

Looking at historically, as you comment, going from Q3 to Q4, we were typically down 10%-15%. Going from Q4 to Q1, we were typically down around 10%. Part of that was driven by the consumer nature of the business historically. Part of what we're seeing now is good growth in that, or the beginnings, it's early, but the beginnings of good growth in the CV, which, because of the profile, the top line profile, I think that will take some of that seasonality out. I think it still exists in the model, and we're going to have to see how that matures out and how CV matures out over the next few quarters. Clearly, we didn't see or we're not guided to see that from Q3 to Q4. When we get out to Q4, we'll guide into Q1.

But some of that seasonality, by the nature of the change in markets and products, is going to go away.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Thanks. And then maybe for Fermi, on the China HiSilicon Dahua dynamic here, it seems to me if HiSilicon struggles to get HiSilicon chips and doesn't use you guys, I'd imagine some of the tier twos you're starting to work with in China might start to grow to a share position that's similar to those guys. Is that how this market's going to play out, or are those two still going to dominate the market, or is one of the tier twos kind of coming up the curve to become as big as them for you potentially?

Fermi Wang (President and CEO)

Well, I need to be very careful about this because some of the tier two you mentioned by customers.

But however, in China, my personal belief that Hikvision, Dahua and Huawei now become the third largest security camera provider, those three will continue to have majority market share just because of their size and the momentum and their product portfolio they already have. I think all the others will have a chance to increase the market share, but will not get to the point that they can challenge the market share of Hikvision, Dahua or Huawei.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Great. Thanks, Fermi.

Operator (participant)

Thank you. This concludes today's question and answer session. I will now turn the call back over to Dr. Fermi Wang for closing remarks.

Fermi Wang (President and CEO)

And thank you, everybody, for joining us today. And I really think that we made great progress on CV side, and I'm looking forward to provide you more updates next time. Thank you now.

Louis Gerhardy (VP of Corporate Development)

Thank you.

Operator (participant)

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