Ambarella - Q3 2023

Transcript

Operator (participant)

Good day, thank you for standing by. Welcome to the Ambarella's Q3 fiscal year earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question-and-answer session, and we ask that you ask one question and one follow-up question. To ask a question during today's session, please press star one one on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would like to turn the conference over to your speaker, Louis Gerhardy. Please go ahead, sir.

Louis Gerhardy (VP of Corporate Development)

Thank you, Lisa. Good afternoon, and thank you for joining our Q3 FY 2023 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO, and Brian White, CFO. The primary purpose of today's call is to provide you with information regarding the results for our Q3 of fiscal year 2023. 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 uncertainty 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 filed with the SEC, including the annual report on Form 10-K that we filed on April 1, 2022 for FY 2022, ending January 31, 2022, and the Form 10-Q filed on September 8, 2022 for the Q2 of our FY 2023. Access to our Q3 FY 2023 results press release, transcripts, historical results, SEC filings, and a replay of today's call can be found on the investor relations page of our website. Fermi will now provide a business update for the quarter. Brian will review the financial results and outlook, and then we'll be available for your questions. Fermi?

Fermi Wang (CEO)

Thank you, Louis, good afternoon. Thank you for joining our call today. Q3 was mostly as expected. While there are material headwinds from an industry-wide semiconductor cyclical downturn, there is no change in our very favorable cyclical growth outlook for the opportunity enabled by our HAI endpoint investments. During Q3, in four key ways, we demonstrated significant progress to develop these opportunities. First of all, our positive market development momentum continues, highlighted by the November 18 announcement from Continental AG that after a multi-year evaluation, they became the first to integrate our CV3 SoCs into their ADAS product lineup. Second, our 6th year automotive revenue is $2.3 billion, an increase of about 28% from the $1.8 billion announced a year ago, with approximately $800 million won business.

This funnel is predominantly driven by our computer vision and the domain controller SoCs. It is important to note our automotive set over the same period is still 10x the size of this new automotive funnel. There is plenty of headroom for share gains. Our content in our customers' product continued to rise as we leverage our historical success with optimized processing for high bandwidth sensing. This is demonstrated by a total blended SoC ASP we estimate will increase about 20% this year. We expect our new SoC, like CV5 and the CV3 to command significantly higher ASPs. We are on track to reach our goal for CV to be 45% of total revenue this year.

With a strong Q4 CV run rate, CV revenue is expected to post strong growth in FY 2024 and become a larger portion of mix. Now I will provide some examples of our market development activity. On November 18, German automotive Tier 1 Continental announced that it will offer advanced driver assistance systems based on our CV3 AI domain controller SoC family. Our high performance, power efficient and scalable SoC portfolio built for ADAS and autonomous replication complements Continental's solution for assisted driving and further advanced vehicle automation. The joint solution with its centralized single chip architecture enables the next generation of vehicles to more quickly perceive environmental conditions by processing multiple sensor input simultaneously. Supported sensing modalities include high-resolution cameras, radars and lidars, as well as ultrasonic sensors.

Our integrated SoC enables the early fusion of raw sensor inputs, wherein the data from different sensor is combined for advanced vehicle automation. The high scalability of our CV3 SoC family allow vehicle manufacturers to choose the optimal performance level for their system requirements while using the same vehicle architecture. Additionally, this joint solution's low power consumption reduces cooling requirements, making sustainable energy saving possible, while also reducing system costs. Continental's ADAS solution was integrated in Ambarella SoC will be showcased for the first time at the CES 2023 in Las Vegas. Also during the quarter, we announced another win in Japan with Toyota, who began shipping its Yaris and Yaris Cross models, featuring a Gentex auto-dimming mirror with integrated digital video recorder.

Based on Ambarella's eight automotive SoC, the dual-channel video recorder features both front and the rear-facing cameras, as well as an app that allows customer to pull recorded video directly to their phones. Mercedes-Benz began shipment of vehicle in China and Korea with a car recorder from Korean tier one supplier Mobile Appliance Inc. Based on Ambarella's H22, the car recorder includes both an ultra HD front camera and a QHD rear camera. In November, we announced that China-based INTEC is in mass production with a driver and an occupant monitoring system that is being delivered to GAC for inclusion in its M-Class SUVs. This system uses single CV25AQ AI SoC and integrates one 2-megapixel driver monitoring camera and the three 2-megapixel occupancy monitoring cameras.

I am also pleased to announce that our CV25 automotive AI SoC has been chosen for driver monitoring application at a major Korean automotive OEM, with production expected to begin in 2023. The CV25 was chosen for its highly efficient neural network processing, combined with very low power consumption. I will now talk about some of our customer developments in the IoT space, starting with the enterprise security camera market. During the quarter, Verkada announced its first multi-sensor camera, the CH52-E, which use a full Ambarella CV25S AI vision SoCs. The camera includes four independent 5-megapixel sensors to offer customer to wide coverage benefits of a fisheye camera, along with the high resolution, high image clarity of the full camera.

Motorola Solutions have made a number of acquisition of video security companies over the last two years, with many using Ambarella SoCs. At the GSX Security Show in September, Motorola announced its new Ava Flex camera based on Ambarella's CVflow AI SoCs. The Ava Flex includes Wi-Fi connectivity and cloud-based video management for ease of deployment, while supporting AI features such as occupant, occupancy accounting and anomaly detection. Also at the GSX show, Korean security leader Hanwha Techwin introduced multiple cameras based on Ambarella's CV2 AI vision SoCs, including new P-series dome cameras with a dual 6-megapixel imagers and AI features. A new T-series camera, including vandal-proof and bi-spectrum AI thermal models.

Other Korea-based customers introducing new models during the quarter included IDIS introduced new camera for license plate re-recognition based on our CV28 entry-level AI SoC, and the Digital Watchdog introducing 5 megapixel and 4K dome models based on our CV22 AI SoCs. In September, Xiaomi launched its latest battery-powered smart door lock featuring 3D structuralized facial recognition. The smart lock unlocks using 3D biometric facial recognition in less than a second, with Ambarella's CV2AM AI processor, performing both the face recognition and the 3D structural light processing. The facial smart lock is also BCTC certified, which meets all of the security requirements for financial transactions in China. In the consumer camera category, Insta360 introduced its X3 360-degree camera based on Ambarella's H22 SoC.

The camera includes a 5.7K active HDR video, 72 megapixel photos, and AI-based editing. We are also seeing opportunities in next-generation AI-featured video conferencing applications, both for home and the commercial use. In China, H3C introduced its MagicHub conferencing system that feature an 8K camera and 8K large screen display. The camera is based on our CV52 AI SoC and it supports ultra wide angle video capture and advanced AI features. In the streaming camera market, Elgato, a unit of Corsair, introduced its Facecam Pro based on our H2 video processor. The Facecam Pro features 4K60 video and advanced features such as pan-tilt zoom, making it ideal for gaming applications as well as solo and group video conferencing.

Ambarella is also in the process of strengthening its ecosystem of design development partners to address new markets and expand our customer base. In November, we announced a comprehensive relationship with eInfochips, an Arrow Electronics company, to extend design and the development services for the next generation of CV4-based AI cameras. This leverages eInfochips' extensive engineering expertise and the resources to support the rapid growth of AI IoT applications, including those in robotics, access control, video conferencing, and the healthcare market. This representative engagements, a majority of which are based on our higher value CV SoCs, provide insight into the early and the continued success of our strategy. In Q4 alone, we expect to ship close to 2 million units of a CV2 family SoCs, and the outlook for the CV2 family remains very positive.

Now with the CV3 and the CV5, we are establishing new CV product cycles, building upon our proven CV2 family and further extending the functionality and the value or ASP we can earn. Continental was early and the first to validate this new CV trend from Ambarella. In the next several quarters, we anticipate sharing more about our customer progress. CV3 in a single SoC synergistically ties all the functionality Ambarella has established over the years: cameras and radar perception, deep learning AI, and the software stack IP. It began 18 years ago when we established our camera perception processing reputation. We are now addressing higher value HAI opportunities serving mega trends such as security, safety, and automation. This machine sensing opportunity are incremental and much larger than the human views market. We see a very favorable secular opportunity in place.

We have the right strategy to address it, and we are continuing to demonstrate early signs of success. We intend to continue to invest the majority of our R&D to fully realize this market opportunities, leveraging our leadership position in the AI endpoint market. With that, Brian will now provide our prepared financial comments.

Brian White (CFO)

Thanks, Fermi. I'll review the financial highlights for our fiscal Q3 and provide a financial outlook for our fourth quarter ending on January 31st, 2023. I'll be discussing non-GAAP results and ask to refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense and acquisition-related costs adjusted for the impact of taxes. Revenue for fiscal Q3 was $83.1 million, in line with the midpoint of our prior guidance range, up 3% from the prior quarter and down 10% year-over-year. Both IoT and auto product revenue increased sequentially. Kitting issue constraints improved. Customer inventory reduction actions resulted in sub-seasonal revenue results as we had expected. Non-GAAP gross margin for fiscal Q3 was 63.5%, in line with our prior guidance range of 63%-64%.

non-GAAP operating expense for the Q3 was $43.5 million, a decrease of 1% from the prior quarter and below our prior guidance range of $44 million-$46 million. The lower than forecasted OpEx was aided by favorable FX impacts on our foreign spending. Q3 net interest and other income was $1.4 million, comprised of approximately $800,000 of interest income $+600,000 of other income. Our non-GAAP tax provision was $1.2 million or 11.4% of pre-tax income. This was higher than our original forecast and typical range, primarily due to taxable FX gains in foreign jurisdictions. We reported non-GAAP net income of $9.5 million or $0.24 per diluted share. I'll turn to our balance sheet and cash flow.

Fiscal Q3 cash and marketable securities increased $1 million-$199 million. DSO increased from 43 to 54 days, driven by the timing of revenue shipments, and days of inventory decreased from 125 days-124 days. Cash from operations was $6 million, and capital expenditures for tangible and intangible assets were $5 million. Free cash flow, defined as cash from operations plus CapEx, was $1 million, and free cash flow on a trailing four-quarter basis was 12.5%. We had two logistics and ODM companies represent 10% or more of our revenue in Q3. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 62% of revenue. Chicony, an ODM who manufactures for multiple IoT customers, was 11% of revenue.

I'll now discuss the outlook for the Q4 of FY 2023. Q4 is typically seasonally slow, down to a high single digit sequentially. This year, the alleviation of some supply constraints is releasing pent-up demand, which we expect to enable our revenue to remain approximately flat sequentially in the range of $81 million-$85 million. Looking into next fiscal year, industry-wide component availability is anticipated to improve further.

Fermi Wang (CEO)

As our lead times to customers continue to contract toward normal levels, we expect customers to continue reducing the amount of inventory they're willing to carry. Macroeconomic concerns are also rising at our customers. Considering the cyclical macro inputs, we anticipate our FY 2024 Q1 revenue to be down more than our normal seasonality would suggest. Back to our fiscal Q4 outlook. We expect non-GAAP gross margin to be between 63% and 64%, flat to the prior quarter. We expect non-GAAP OpEx in the Q4 to be in the range of $46 million-$49 million, with an increase compared to Q3, driven by the continued build-out of new advanced CV3 SoCs and CES marketing activities. We estimate net interest and other income to be approximately $700,000. Our non-GAAP tax rate to be in the range of 5%-10%.

Our diluted share count to be approximately 39.5 million shares. Ambarella will be participating in ARK's Future Series Technology Conference on December 5, Nasdaq's London Investor Conference on December 6, Imperial Capital Security Investor Conference on December 15, and Needham's Growth Conference on January 10. Sell side analysts are also offering small group tours of our CES demos between January 4 and January 7 in Las Vegas. Please contact us for more details. Thank you for joining our call today. With that, I'll turn the call over to the operator for Q&A.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. As well, one question and one follow-up. One moment while we compile the Q&A roster. The first question that we have today is from Matthew Ramsay of Cowen. Please go ahead. Your line is open.

Matthew Ramsay (Managing Director and Senior Semiconductor Analyst)

Yes, good afternoon. Thank you guys very much for taking my questions. First of all, confirming for yourself and the whole team, congratulations on the Continental deal. I wanted to ask just a few details about how that came together. It seems like even in your pre-silicon simulation results and all of those things that they had been evaluating the CV3 platform for a while, and no doubt that they were one of the early sampled customers of CV3. Just maybe if you could walk us through how you went from simulated performance and power and capability metrics for CV3 onto sampled product, onto the press release that they had and sort of the scope of the wins that you might have with Continental?

I guess on the detail side, you updated your automotive funnel up 28% and from $600 million-$800 million on one business. How is the Continental deal and potential customer wins from that relationship contemplated in the changes to your automotive funnel? Thanks.

Fermi Wang (CEO)

Right. Well, first of all, thank you. I think that's definitely helpful. I think the Continental, we have been working with Continental for a long time, even before when we tape out and also produce our first generation CV2, we start talking to Continental. As you can see, this is a long process because really our claim of our CV2 performance and the power efficiency, it's hard to digest if you don't see a real silicon. With CV2, we prove to them that the efficiency of architecture and we can deliver what we promised. As you know, CV2 is good for ADAS for the level II car, but for the level II+, level III, obviously they need a more powerful chip like CV3.

We start talking to them about CV3, I would say 2 years ago, with just a PowerPoint and our simulation. Of course, because with CV2 silicon, we can really justify how we achieve the performance and power efficiency with our CV3 silicon and plus our simulation. But the deal is really closed when we sample our CV3 chip and the development platform to them, and they verified our claims on the performance and power efficiency. I think that's the time that we really have a major breakthrough with Continental, and they are totally convinced our claim and they decide to move forward with this relationship. I think that's one reason.

The other reason is that I think we are the one of the very few companies showing off on the, we have a solution from the very low end for, like, you know, the driver minus system to the e-mirrors, to a level II, front cameras to level II+, level III, level IV. We have a silicon roadmap to cover the whole space that our customer want with a single software base. I think that's another reason that really, I think our customer like Continental appreciate and that help us to secure this deal.

Also, like Louis said, you know, we are expecting continue to do more business development, and we hope we can continue to give you updates in the next quarter in terms of our CV3 business development. In terms of potential design win, I think, you know, because the Continental price we didn't talk about, I will leave them to answer this question. I have to believe that with because Continental is such a reputable and a large customer, and they have credibility in front of OEM customer, that will definitely, between Continental and us, we should be able to get or design win for OEMs and, or it will gradually show up in our sales funnel in the near future.

Matthew Ramsay (Managing Director and Senior Semiconductor Analyst)

Thank you for all the detail, Fermi. I really appreciate it. Just, I guess a final clarification on my first question and sort of a follow-up for Brian. Just to clarify, you guys raised the automotive revenue six-year funnel from $1.8 billion-$2.3 billion, and the one business from $600 million-$800 million. Is the Continental relationship contemplated in both of those numbers, one of those numbers? If you could be a bit precise on what you guys are assuming in the funnel from that relationship, and did it materially change when the deal was announced? I guess my follow-up for Brian, you talked about maybe underperforming normal seasonality as you go into fiscal Q1.

Maybe the last couple of years have been very strange seasonally for the whole semiconductor space, given shortages and all kinds of other things going on. If you could maybe give us a little bit of clarity about what you're assuming normal seasonality is for fiscal Q1? Thanks, guys.

Fermi Wang (CEO)

You know, I will take on the first question. I will ask for Brian to take on the second question. The first question is about how Continental play into the two numbers. I think, you know, I think Continental's contribution with the current funnel is little, and there are some of them. However, I think that we expect that this number of Continental's impact to our funnel will start showing up in the next funnel next year. Also, we expect that we don't have any Continental contribution in the one business yet.

Brian White (CFO)

Relate to your question on normal seasonality in Q1, of course, normal is always difficult to define, but the way we looked at it is taking a five-year average. In that case, the five-year average for Q1 would be a sequential decrease of 4%. As we sit here today, we think that the decrease going into Q1 will be greater than that number. We don't have perfect visibility at this point to what it'll be, but we want to provide as much outlook as we can at this time.

Matthew Ramsay (Managing Director and Senior Semiconductor Analyst)

Thanks, guys. Really appreciate it.

Operator (participant)

Thank you for your question. The next question will be coming up shortly. One moment please. That question will be coming from David Kelley of Jefferies. Your line is open.

David Kelley (Senior VP of Equity Research)

Good afternoon, guys, and thanks for taking my questions. Maybe to follow up on the funnel discussion. You announced a couple pretty meaningful driver monitoring wins, an e-mirror win as well. How should we think about, you know, maybe framing it as the interior contribution to the auto funnel versus, say, the ADAS and autonomous contribution to that funnel growth?

Fermi Wang (CEO)

First of all, as you can see, for those kind of design wins, the design cycle is much shorter than ADAS because that they are not really safety sensitive. For ADAS projects, we usually look at, you know, in China, more than two years development, outside China, up to four-year development. For this kind of internal designs, usually you can think about 12 months-18 months cycle that you can get into production. That's why you start seeing more of those design wins. That's definitely area that we want to be really having high market share, and that's what we are doing. But that doesn't mean we don't focus on ADAS.

In fact, on the contrary, I believe that, we are doing well with ADAS as well as level 2 plus, and hopefully we can give you more design win activity in the future.

David Kelley (Senior VP of Equity Research)

Okay. Got it. Thank you. Maybe a quick follow-up to your point on kind of the timeline of adoption and specific to Continental, you know, very early days as you demonstrate, with them to customers. Any early thoughts on timeline to eventual revenue contribution, with this partnership? Are you seeing OEMs push to accelerate development to integration into production timeline faster in ADAS and autonomous as well?

Fermi Wang (CEO)

First of all, I, you know, I will leave Continental to answer the potential revenue that we, they can generate with this relationship. Like we said before, any CV3 design win will take three years, four years to get to revenue, and I don't think the timeline has changed.

David Kelley (Senior VP of Equity Research)

Okay. Got it. Thank you. I appreciate you taking my questions.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. The next question that we have will be coming from Joseph Moore of Morgan Stanley. Your line is open.

Joseph Moore (Managing Director)

Great. Thank you. I wonder if you could talk to, you know, the pace at which that funnel can start to turn to revenue. I think it's a six-year kind of timeline that you talked about. I assume that's pretty back-end loaded given that your numbers are so much bigger than what you're shipping now. Can you just give us a sense for how quickly that revenue can roll in? How much of that is still... I don't want by all means be precise, but I know there's a probability weighting on some of it. Can you talk to, you know, how much of that we should think of still as being a probability weighted event?

Louis Gerhardy (VP of Corporate Development)

Hey, Joseph. Yeah, the methodology behind the funnel and how we discount both one and, you know, pipeline didn't change from, you know, our prior practice. With regards to the distribution of the revenue through the six years of the funnel, it's not linear. As you can imagine, it's, you know, exponential in shape, where the sixth year is, you know, much higher than the 1st year. The reason for that would be, you know, the time to revenue that Fermi was just describing in a prior question. It's also very significantly driven by increased penetration rates of these new technologies. Most importantly, it's actually the higher ASP of the products that we'll be selling in each of these six years. For example, CV3 contributes revenue in years five and year six, like we expect.

The ASP per chip is much higher than it would be for, say, a DMS, CMS win with a CV25 product. Those are the factors that cause it to be exponential in shape, not linear.

Joseph Moore (Managing Director)

Great. Thank you.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. The next question that we have is coming from Ken Wong of Stifel. Please go ahead. Hello, your line is open.

Jeremy Kwan (Associate VP of Equity Research)

Hi, can you hear me?

Operator (participant)

Yep. Yes, we can.

Jeremy Kwan (Associate VP of Equity Research)

Hi, sorry, this is Jeremy Kwan calling on behalf of Tore of Stifel. I guess, maybe a question first on the ASPs. Can you give us any more color in terms of where they stand today? I understand, you know, that once CV3 starts contributing, that's gonna go up even more significantly. Can you help us just give us more details on where they are today and where you see that, I believe you said it's gonna grow 20% this year.

Fermi Wang (CEO)

Right.

Jeremy Kwan (Associate VP of Equity Research)

Is that for this fiscal year or? Thanks.

Fermi Wang (CEO)

Yes. I think the comment is for this fiscal year, it was at high single digits, and now I think it's beyond about $10 ASP right now. The major contribution come from, you know, the increased sales of our computer vision chip. In fact, that's probably the biggest items which help us to continue get higher ASP. Now with the CV5 really getting into a ramp-up in production and we start sampling CV3, I also expect that our ASP will continue to this uptrend.

Jeremy Kwan (Associate VP of Equity Research)

Great. Thank you. I guess a quick question on the OpEx. You know, I understand some of that is CES for next year or starting January. I guess excluding CES, what kind of run rate should we think about as we look to FY 2024? Thank you.

Brian White (CFO)

Sure. We're still bottoming out on our OpEx budget for next fiscal year. I guess the way I would think about it at this point is consider the exit velocity of our guidance for fiscal Q4, which at the midpoint was about $47.5 million. Going into next fiscal year, we're gonna have additional chips in development that would cause that number to increase. You've got two things to consider. Number one, OpEx has been increasing throughout FY 2023, Even if OpEx remained flat at the Q4 forecast level, it would be up on a year-over-year basis. In addition to that, we'll have some additional spending requirements. That's about what I could give you at this point. In next quarter's call, I think we can provide some more insight.

Jeremy Kwan (Associate VP of Equity Research)

Great. That's very helpful. Thank you.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. The next question that I have is coming from Kevin Cassidy of Rosenblatt. You can go ahead, please.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Yeah, thanks for taking my question, and congratulations on the Continental win. You know, on the Continental win, are there expectations for them to use the scalability of CV3? You know, will they have a low-end solution and a high-end, you know, maybe three different solutions?

Fermi Wang (CEO)

Yes. First of all, thank you. Also, I believe your read is right. In fact, in their press release, they do come talk about one of the reason they choose the CV3 family is because they can use a same software structure to apply it from low-end to a high-end product line.

Kevin Cassidy (Managing Director and Senior Research Analyst)

I see. Is the Oculii or now Ambarella radar solution included in the overall design, or is it still to be determined?

Fermi Wang (CEO)

In the press release, we didn't talk about radar, so I'll keep that. You know, we'll give you more update when we have the right to talk about the potential radar collaborations.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Okay, great. Well, congratulations again.

Fermi Wang (CEO)

Thank you.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. The next question I have is coming from Tore Svanberg of Stifel. Your line is open.

Tore Svanberg (Managing Director and Senior Analyst)

Yes, thank you. I had a follow question on the Continental win and again, congratulations on that. If you could just expand a little bit on sort of the, how the sales strategy works there, 'cause obviously you're providing some functionalities, but obviously, you know, maybe some other companies will provide others. Is this like a full reference platform that Continental is offering? If you could just, you know, add a little bit of context on how you go to market specifically with all the parts that are part of that particular solution.

Brian White (CFO)

Yes. first of all, CV3 will be the domain controller for the system that we are talking to Continental about. The goal is that there is no other major processing chips on that system. The CV3 will take in multiple different sensor modality and perform not only just the perception but also all the higher level software functions that the software is provided by Continental.

Tore Svanberg (Managing Director and Senior Analyst)

Great. Thank you. A follow question on CV3. It sounds like you're starting to at least thinking about, you know, leveraging that platform into non-auto applications. I was just wondering both from a sort of capacity and also from a timing perspective, you know, when CV3 could start to venture into other non-auto applications. I guess the reason why I ask the question is because, you know, you obviously have a lot going on here in the auto space. I'm just wondering if you have enough resources to go after, you know, non-auto applications for CV3.

Fermi Wang (CEO)

Right. First of all, using CV3 in a robotic application is definitely a strategy that Ambarella is implementing. Like you said, we are a small company. We have limited resource. Therefore, we need to target and be focusing on strategy accounts. In auto, we have done obviously, Conti is the first one. There are a few more. In a robotic space, definitely our strategy is to have a target customer who has already some products in the market and as well as they really need performance like CV3 family chips. Doesn't matter if it's high-end, low-end.

Because if you look at a lot of the robots out there are multiple processing silicon in that robot today, definitely they can use some kind of domain controller like CV3 to integrate those functions together and provide not only the better cost, but also better system design as well as the power efficiency. I think that's definitely a market we will continue to work on.

Louis Gerhardy (VP of Corporate Development)

Yeah, Tore, it's Louis. I'll just add, it's a good question because, you know, mobile robotics applications, are not part of our automotive funnel. That is something that's separate and not reflected in that funnel we've communicated.

Tore Svanberg (Managing Director and Senior Analyst)

Great. Thank you for all the information. Appreciate it.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. The next question I have here is coming from Suji Desilva of Roth. Please go ahead.

Suji Desilva (Managing Director and Senior Research Analyst)

Hi, Fermi, Brian Lewis. I'll add my congratulations on the Continental win. Quick question perhaps for Fermi. I think you hinted at this in Tore's question there. The software development that's involved to get CV3 into production, how much of that is the Continental and its customers versus Ambarella? It sounds like it's almost all Continental. If so, is there an incremental effort that needs to be happening for every customer that adopts CV3 thereafter, or is there any leverage from the first win?

Fermi Wang (CEO)

Right. First of all, I think, you know, our role in this relationship is we are strategic Tier 2 to Continental, and we are providing support to them. One of the support we need to provide is porting their software onto our CV3, which, you know, we have been talking about this strategy for many years. We believe we are the one that really focus on this business model versus our competitors. I think this is, you know, it's really about setting up a group of people helping our customer porting software. That is, has a plug-in. We have factored that into our head count planning as well as our engineering development. I think that's not a concern for us.

In fact, we expect that we need to continue to do this kind of service for all of the potential customers.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. That helps, Fermi. Question for Brian, perhaps. Brian, you guided the first quarter next year as well as this year. Are there lingering supply chain post-kitting constraint issues factored into your below seasonal guidance for Q1? Are those kind of behind us at that point? Is that purely a statement about softening demand?

Brian White (CFO)

We think that those supply chain issues are, for the most part, behind us, and that's something that we don't anticipate to impact our Q1 revenue significantly. What we do see is continued shortening lead times and desire on the part of customers to reduce inventory levels. That's really the impact that we're contemplating as we think about Q1 at this point.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Thanks, Brian. Thanks, guys.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. The next question that I have here is coming from David O'Connor of BNP Paribas. Your line is open.

David O'Connor (Security Analyst)

Great. Thanks for taking my question. One from my side on the CV penetration. Fermi Wang, you mentioned that our reiterate of 45% for this year. Just wondering, can you give us any update on what the exit run rates of this year would be so as to kind of baseline us for next year? Another follow-up.

Fermi Wang (CEO)

Yeah. David, we haven't disclosed the run rate as well as the next year forecast. I can say that, you know, we expect the CV continue to become bigger portion of total revenue for many reasons. One is that they're enabling new markets. The other one is their new ASPs. Of course, that, you know, portion of CV growth come from, you know, replacing our existing video processor business. I think that I'm very excited about the new application that we talk about that our previous video processor chip cannot address, and particularly CV3 and CV5 opportunity we're talking about today is really a new opportunity we can address.

David O'Connor (Security Analyst)

Okay. Got it. Thanks for that. Maybe as a follow-up, one for Brian on the sub-seasonal Q1. Brian talked about inventory, being reduced to customers. Can we expect by or do you expect in exiting Q1 that that inventory that you're seeing there customers should be cleared? Thank you.

Brian White (CFO)

I think that's a great question. I think it's one that we don't have great visibility to, so I'm not gonna speculate on that. We certainly in the near term, anticipate that there will be impacts, within that time period, and that's why we want to provide some visibility. In terms of when things bottom and so on and when those issues go away, I don't think we have a good feel for that at this point.

David O'Connor (Security Analyst)

Understood. Thank you.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. The next question I have here is coming from Richard Shannon of Craig-Hallum. Your line is open.

Richard Shannon (Senior Research Analyst)

Well, hi, guys. Thanks for taking my questions as well. Maybe I'll ask you a question on the IoT side of the business here. Maybe Fermi, if you can talk bigger picture here over the last year, how the penetration CV has gone into maybe both sides of the security business, and where do you think that will go over the next year or two? It'd be a great perspective over that time. Thanks.

Fermi Wang (CEO)

Right. I think that's a great question. We continue to see strong IoT design wins on all of the market we're talking about, professional security and the consumer security and also others. I think like I said before, some of it is driven by new application that we talked about today. For example, this face, the Xiaomi introduced a new lock, which is using 3D matrix to identify face. Also, we're talking about other applications like video conferencing, which is really new market enabled by our CV product line. I think for IoT space, outside of China, we are doing quite well.

At the same time, I want to highlight again that with the new U.S. regulation, we have basically zero play in China in the IoT, particular security MR space. I think that's something I want to highlight about. We talk about Hikvision Dahua will be zero revenue for us next year.

Richard Shannon (Senior Research Analyst)

Okay. Perfect. Thanks for that update. My second question is on Continental here. Looking at from one angle, and you've mentioned both today and in past calls regarding, you know, having a solution that really addresses all, you know, vision related opportunities, both it's within and without the car here. As I look through the Continental press release, from whatever, a week or two weeks ago, I didn't see any mention of kinda indoor use cases there. Maybe I scanned too quickly, but is that being contemplated here, or is that something you can discuss, and/or do you see other OEMs coming through the funnel here that you will have both interior and external use cases because you have that full offering others don't?

Fermi Wang (CEO)

Right. For the Continental press release, they basically focus on only one application, which is ADAS. ADAS mainly is for external use. However, I do believe that they appreciate that we offer a complete roadmap that goes from external to internal. I want to say that the press release is targeted only for one application, one possible opportunity between Continental and us.

Richard Shannon (Senior Research Analyst)

Okay. Fair enough for that update. That's all for me, guys. Thank you.

Fermi Wang (CEO)

Thank you.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. The next question I have is coming from Ross Seymore of Deutsche Bank. Your line is open.

Sebastian V J (Senior Analyst)

Hi, guys. This is V J Sebastian on behalf of Ross Seymore. First off, thanks for letting me ask a question here, I was just hoping to get some color on sort of the revenue split between your IoT and auto segments, both for the reported quarter and the implied guide. Thanks.

Brian White (CFO)

The approximate split would be about 75/25, IoT versus automotive.

Sebastian V J (Senior Analyst)

Cool. Just a quick follow-up. How should we sort of think about that going into next year? I mean, do you guys see that dynamic changing significantly, or are we still going to ride sort of the same split for the foreseeable future?

Fermi Wang (CEO)

Well, like I said, you know, we haven't given any guidance for next year. Like I said, we expect auto percentage will continue to increase because the funnel that we're building. That should be the trend where we are expecting.

Sebastian V J (Senior Analyst)

Awesome. Thank you so much and congrats.

Operator (participant)

Thank you for your question. That concludes today's Q&A session. I would like to turn the call over to Dr. Fermi Wang for closing remarks. Go ahead, sir.

Fermi Wang (CEO)

Thank you. Thank you all for your time and consideration. We hope to see you at CES or one of the other coming events. Thank you and goodbye.

Operator (participant)

This concludes today's conference call. You all may hang up and everyone have a great rest of your day.