Ambarella - Earnings Call - Q4 2021

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to Ambarella's Fourth Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in our listen-only mode. After the speaker's presentation, there'll be a question-and-answer session.

To ask a question during the session, you will need to press stars and one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press stars and zero. I would now like to hand the conference over to your host today, Louis Gerhardy, Corporate Development. Please go ahead.

Louis Gerhardy (Head of Investor Relations)

Thank you, Sarah. And good afternoon, everyone. Thank you for joining our fourth quarter and our fiscal year 2021 financial results conference call. On the call today is Dr. Fermi Wang, President and CEO, and Casey Eichler, CFO. We're dialing in today from different locations. Consequently, I'll be covering Casey's prepared remarks, and then Casey will be online for Q&A. The primary purpose of today's call is to provide you with information regarding our fourth quarter and our fiscal 2021 results.

The discussion today and the responses to your question will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements.

We're under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we filed with the SEC, including the annual report on Form 10-K that we filed on March 27, 2020, for fiscal year 2020, ending January 31, 2020, and the Form 10-Q filed on December 9, 2020, for the third quarter of fiscal year 2021.

Access to our fourth quarter and fiscal 2021 results press release, historical results, SEC filings, and a replay, as well as the prepared transcripts of today's call, can be found on the investor relations portion of our website. With that, I'll turn it over to Dr. Fermi Wang.

Fermi Wang (President and CEO)

Thank you, Louis, and good afternoon, everyone. Thank you for joining us today. Our multi-year CV AI investment is the major factor in the accelerated business momentum we are reporting. Fiscal year 2021 revenue of $223 million was down 3% from the prior year, with the CV growing significantly, exceeding 10% of total revenue for the year, with the video processor business down around 10%. Fiscal year 2021 came with many challenges: the pandemic, geopolitics, and an increasingly tight supply chain.

These factors remain to varying degrees today. I'm pleased with how we have managed this environment. As I look into fiscal year 2022, my goal is to maintain a high level of execution and leverage our leadership position with our differentiated and proprietary CV AI silicon.Q4 finished the year on a strong note, with revenue 4% above the high end of our guidance range, driven by CV, with the number of production CV projects doubling sequentially.

Ambarella's highly focused video and image processing R&D investment crossed over a cumulative $1 billion in Q4, with almost half of this amount directed to our proprietary AI technology development. In fiscal year 2021, validation of this investment was strong, as more than 175 unique CV customers purchased engineering parts and/or development systems, including more than 40 reaching production volumes in the year.

By the end of the current quarter, we expect to have shipped more than 2 million CV SoCs on a cumulative basis, with more than 300,000 CV SoCs shipped into the automotive market.I'm extremely proud of our new product execution, as demonstrated by the introduction of our flagship CV5, the first in a family of 5-nanometer AI vision processors.

As we look into fiscal year 2022, our guidance contemplates supply chain supply-side challenges, growth in the organization, an expanding product portfolio, and the development of a number of increasingly diverse markets. We remain confident the CV AI market is still in its early stages, and we continue to expect CV to be at least 25% of total revenue for the year, with the video processor business posting moderate growth. I will now provide an update on our customers and markets.

At the beginning of the year, we introduced our CV5, an artificial intelligence AI vision processor capable of recording 8K video or full 4K video streams.The new SoC will enable the development of intelligent automotive camera systems, consumer cameras, and robotic cameras. It combines Ambarella's powerful CVflow AI engines with dual-arm A76 CPUs to provide the performance necessary for a wide range of AI-based algorithms.

Fabricated in the most advanced 5-nanometer process technology, we believe CV5 sets a new industry benchmark for power consumption, consuming approximately two watts of power while encoding 8K video at 30 frames per second or five watts at 60 frames per second. In January, Ambarella held its annual customer technology event, during what would have been the CES.

Our virtual event was held over a two-week period and included the individual live hosting of over 200 worldwide customers spanning automotive, consumer, robotic, and IoT markets.Featuring over 30 technology demonstrations with an emphasis on advanced AI applications, the event was a great success, allowing us to keep engaged not just with existing customers, but to meet many new ones that might not otherwise have been able to travel to Las Vegas for a live show.

During the quarter, at the Amazon re:Invent show, AWS announced their new Panorama SDK with support for Ambarella CVflow SoCs. The Panorama SDK allows device manufacturers to easily build edge computer vision devices for a wider array of use cases across industrial IoT and other segments. Ambarella was chosen as one of the only two initial semiconductor partners to build an ecosystem of hardware-accelerated edge AI devices, with our solution targeting intelligent camera designs.

I would now like to take the opportunity to describe some of our customer-related highlights from the quarter, starting with the automotive market.Today, we announced that Motional, a global leader in driverless technology, has selected Ambarella's CVflow family of AI processors. The processor works with Motional's network of LiDAR, camera, and radar sensors to enable the vehicle's safe operation in diverse and challenging road conditions. Motional is leading the industry in making driverless vehicles a reality.

The company recently became among the first in the world to put driverless vehicles on public roads and announced a landmark agreement with Lyft for the largest deployment of robotaxi on a major rideshare network. The company's driving record includes navigating more than 1.5 million miles in diverse environments and providing more than 100,000 public rides with zero at-fault incidents. It has also led the establishment of industry-leading safety standards, having co-published the Safety First for Automated Vehicles white paper.

Ambarella's CVflow SoC will be part of the central processing module in Motional's driverless vehicle, providing image and computer vision processing for cameras in the sensing suite, including the front-facing cameras. The CVflow AI engine will enable Motional AI algorithms to perform complex computer vision tasks, such as object detection, classification, and image segmentation, with industry-leading power efficiency.

Ambarella's advanced image processing will allow the vehicles to operate in challenging lighting conditions, including low light and high-contrast situations, while the SoC's H.264 encoding will enable logging of video data from all cameras in the vehicle. In the Chinese automotive market, the world's largest, we have won a number of driver monitoring and a combination with driver monitoring plus in-cabin monitoring designs in passenger vehicles.

These designs are with leading automotive OEMs and are expected to enter into mass production this year.The designs leverage Ambarella's CVflow AI processing to enable driver safety functions, such as detecting distracted or drowsy drivers, as well as our SoC ability to process RGB-IR images. The designs are based on our CV25 SoCs, as well as our new CV28 SoC, which we announced in the fourth quarter of last year.

Also, during the quarter, Ford introduced a dual-fit dash camera for its European model based on Ambarella's A12A automotive SoC. Designed by Falcon Electronics, the small form factor wide-angle HD cameras fit into the rearview mirror zone of the wide windscreen without obstructing the driver's view and integrates with Ford's Sync 3 screen and voice control. And in China, Joint Venture FAW-Volkswagen introduced its new CC passenger car with a dual-fit HD DVR based on Ambarella's A12A SoC.

Also, during the quarter, a major home monitoring camera maker entered into mass production of a new class of intelligent camera based on our CVflow SoCs. Ambarella is beginning to see significant CV growth in home security cameras. Customers' requirement for cameras with higher quality alerts, realized with advanced hardware designs and more sophisticated algorithms for object detection, motion detection, and package protection, are driving the adoption of Ambarella's CVflow SoCs.

In January, Alarm.com released its touchless video doorbell, eliminating the need to physically press a doorbell button. The doorbell recognizes when a person stands on your door mat and sends a mobile alert, allowing you to see and talk to your visitor from wherever you are. Based on Ambarella's S5L, it includes a 150-degree vertical field of view to allow viewing of packages, full HD resolution, IR night vision, and HDR processing.

Also, during the quarter, Logitech launched its Circle View wired doorbell. The first consumer doorbell includes Apple HomeKit Secure Video. The doorbell leverages users' existing iCloud storage for video recording without paying a separate subscription and provides a seamless viewing experience with the home app on iPhones, Apple Watch, or other Apple devices.

The doorbell is based on Ambarella's S5LM SoC. In the professional IP security camera market, Ambarella has continued to benefit from customers migrating from HiSilicon to our solutions and from widespread adoption of SoCs based on our CVflow AI architecture. During the quarter, Dahua, the world's second-largest security camera maker, continued its migration to Ambarella with multiple product launches. For intelligent transport systems products, our CV2 SoC is being used for three, five, and nine-megapixel ITS cameras.

In IP security cameras, our CV22 and the CV2 SoCs are now shipping for four- and eight-megapixel designs with advanced analytics. Korean market leader Hanwha Techwin further extended its portfolio of Ambarella-based IP security cameras, including a new three-channel multidirectional camera based on our CV22 CVflow SoC, a new four-channel panoramic camera based on our flagship CVflow CV2 SoC, and a new five-megapixel corner mount model based on our S3L63 SoC.

During the quarter, IDIS, Korea's second-largest camera supplier, introduced three new camera families based on our CVflow CV22, S5L, and the S3L SoCs. The new cameras include fisheye, five-megapixel and eight-megapixel models, and leverage intelligent codec capability to reduce network bandwidth and storage requirements. In Europe, German IP camera specialist Dallmeier introduced its new Panomera S camera based on CV22.

By combining several lenses and sensors with different focal lengths, the Panomera S is able to capture the remote and the middle areas with the same high resolution as the scenes in the foreground. We are continuing to see opportunities in new classes of sensing cameras spanning multiple vertical applications, such as access control, occupancy monitoring, and retail analytics.

During the quarter, G-Next, a leading provider of 3D time-of-flight sensor systems, introduced a people-counting camera targeting transport and building monitoring applications. Based on our CV25 CVflow SoC, it includes both a visible CMOS sensor and a ToF sensor, with CV25 performing sensor fusion and AI processing to provide high-accuracy people-counting. In summary, we are leveraging our successful video processor heritage into the development of a highly optimized visual AI family of SoCs.

In essence, our addressable market is expanding beyond human viewing applications to include the installed base of machines that can now use our CV SoCs to visually perceive their environment and make decisions, leading to higher levels of autonomy and eventually automation. The adoption of our expanding family of visual AI silicon into increasingly diverse markets, including pure machine sensing, was demonstrated by the Motional announcement today. It's in the early stage, but it's taking shape.

And as this adoption drives revenue growth, we expect to continue to deliver positive earnings leverage to shareholders. In our earnings calls on June 4, 2019, we provided guidance on the anticipated shape of the first three waves of CV revenue. We stated Wave 1, professional security, will become mature in calendar year 2020. Wave 2, home security, will become mature in calendar year 2021.

Wave 3, automotive, will become mature in the calendar year 2022-2023 timeframe. We achieved our Wave 1 goal in the last year, and I am confident we are on track to achieve Wave 2 and 3 in their prospective timeframes. The last CV wave, automotive, is firmly on track, as we have indicated with our communication last quarter on our automotive revenue funnel. In fiscal year 2022, driven by CV, we anticipate our auto business will grow at a rate that is significantly higher than the other business.

This is important as our automotive SAM is estimated to be about two-thirds of total SAM in fiscal year 2022, or more than $3 billion, going to almost $7 billion in fiscal year 2026. The mega trends for security, safety, and automation are very favorable.To address these secular growth forces, we continue to build our team globally to support the rising interest in our CV SoC from existing and new markets.

I would like to thank all of our employees for their contribution to our leadership position in the market and for their execution in this turbulent environment. Thanks to all our other stakeholders for your continued support. I will now turn the call over to Louis, who will give you more details about how we are seeing and expect for the business. Thank you.

Louis Gerhardy (Head of Investor Relations)

Thank you, Fermi. I will review the financial highlights for the fourth quarter and the full fiscal year 2021, ending on January 31, 2021, and provide an outlook for our first quarter of fiscal year 2022 that ends on April 30, 2021. We will be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we've eliminated stock-based compensation expense adjusted for the impact of taxes.

Despite the pandemic, geopolitical, and supply chain challenges, revenue in fiscal 2021 decreased 3% to $223 million, as strong CV product ramp offset much of the headwinds. For the year, security camera revenue represented about 60% of revenue, with the balance roughly split between auto and other.

For fiscal year 2021, non-GAAP gross margin was 61.4%, up from 58.5% in fiscal year 2020, driven primarily by the richer product mix, as two of our professional security camera customers in China had an anticipated reduction in their safety stock. Non-GAAP operating expenses increased 10%, primarily due to a $10 million increase in R&D. Our cash flow from operations was $30.8 million for the year, and with no debt, net cash, and marketable securities totaled $440 million.

Driven by CV products, Q4 revenue of $62.1 million was 4% above the high end of our guidance range of $56-$60 million. These results represent an increase of 11% from Q3 and an increase of 9% when compared to the same quarter a year ago. Auto revenue increased more than 20% sequentially and year over year.Security camera sequential growth was about 20% and began to grow again on a year-over-year basis after the anticipated trough in Q3. Other revenue experienced a seasonal decline.

Non-GAAP gross margin for Q4 was 61.4%, slightly above the high end of our guidance range of 59%-61%. As anticipated, gross margin declined 129 basis points from the prior quarter due to the product and customer mix in the quarter. Non-GAAP operating expense for the fourth quarter was $33.4 million compared to $32.4 million in Q3. This was slightly above the high end of our guidance range of $31-$33.

Other income was about $600,000, primarily representing interest income on our cash and marketable securities. Non-GAAP net income for Q4 was $5.1 million, or $0.14 per share, compared to $3.3 million, or $0.09 per share in the third quarter.The non-GAAP effective tax rate in Q4 was 4%, as the distribution of profits shifted towards lower-rate jurisdictions. In the fourth quarter, non-GAAP earnings per share were based on 37.6 million shares.

Total headcount at the end of the fourth quarter was 785, with about 81% of employees dedicated to engineering, most of whom are focused on software. Approximately 69% of our headcount is located in Asia. In Q4, we generated positive operating cash flow of $12.5 million. Total accounts receivable at the end of Q4 were $25 million, or 37 days of sales outstanding. This compares to accounts receivable of $24.1 million, or 39 days outstanding at the end of the prior quarter.

Net inventory at the end of the fourth quarter was $26.1 million, compared to $23.7 million at the end of the previous quarter.Days of inventory decreased to 93 days in Q4 from 102 days in Q3. We had two 10%-plus customers in Q4. WT Micro, a fulfillment partner in Taiwan, who ships to multiple customers in Asia, came in at 68.4% of revenue. And Chicony, a Taiwanese ODM, who manufactures for multiple customers, primarily U.S.-based, came in at 13.8%. I will now discuss the outlook for the first quarter of fiscal year 2022.

We continue to have strong design activity in all of our markets. As you've heard, the semiconductor industry supply chain has become increasingly tight, and it's now very difficult to support customers who place orders inside of our lead times, which have been increasing. In addition, the Texas freeze impacted one of our vendors' operations. And while they are in the process of recovering, we do not yet know the final impact.

To the best of our ability at the current time, our guidance contemplates these supply-side dynamics. Despite these challenges, with multiple CV programs ramping production, we expect to perform better than the typical downward seasonal trend in Q1, with revenue anticipated in the $67 million-$70 million range, or up 8%-13% sequentially. Auto revenue is anticipated to increase more than 20% sequentially, with security up in the low to mid-teens sequentially and other down about 20% sequentially.

We continue to monitor the outstanding geopolitical challenges, including the risk of dual supply chain and what that means for our ability to continue to supply our customers in China. In our prior earnings calls, we estimated two professional security camera customers in China had pulled in roughly $10 million of video processor revenue from fiscal year 2021 into fiscal year 2020.

We believe this video processor inventory correction is largely complete, with these two customers combined representing a low teens % of our total revenue in Q4. As discussed in our November 23 earnings call, and as Fermi described today, Dahua commenced mass production of multiple products in Q4, with several of our CV SoCs utilized. We estimate Q1 non-GAAP gross margin to be between 59.5% and 61.5%, compared to 61.4% in the fourth quarter.

Our guidance considers some higher costs and expenses that we're incurring to expedite orders and secure more capacity. We expect non-GAAP OpEx in the first quarter to be between $34 and $36 million, with the increase from Q4 primarily coming from an increased engineering headcount, payroll tax accruals, and other engineering expenses. The Q1 non-GAAP tax rate should be modeled at 10% versus 4% in Q4.

We estimated our diluted share count for Q1 to be approximately 37.8 million shares. Ambarella will be participating in the Morgan Stanley TMT conference tomorrow, March 3, Berenberg's American Innovation Seminar on March 4, Baird's Vehicle Technology and Mobility Conference on March 10, and the Roth Conference on March 15, and Bank of America's Auto Summit on March 30. Please contact us for more details. Thank you for joining our call today. And with that, I'll turn the call over to Sarah for Q&A polling with Fermi and Casey available.

Operator (participant)

Thank you. As a reminder to ask a 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 a line of Matt Ramsey with Cowen. Your line is now open.

Matt Ramsey (Managing Director and Senior Research Analyst)

Yes, thank you very much. Good afternoon, guys. I thought it was interesting a couple of points on your prepared script, Fermi, that you had talked about, number one, the very large number of engagements. I think you mentioned, what, 175 now of folks that have taken engineering samples for CV-based products.

And then you also sort of talked about this movement from sort of phase one of CV adoption into what you guys talked about of Wave 2 that might extend into home security. So maybe you could help us break down the number of the engagements, I think that 175 number, by whether we're in Wave 1 or 2 or 3 and what the customer concentration and mix looks like of those engagements. That would be really helpful. Thank you.

Fermi Wang (President and CEO)

Yeah, thank you, Matt. In terms of the customer engagement, I will say that it's a little from the security camera, both for professional consumer. The total number of those customers probably a little more than the automotive, but it's quite balanced. And so that, in fact, you can see that we talk about 40 customers in production. I will say majority of that is in professional security camera, and we are seeing some of the consumer security camera going to production.

I also mentioned there are a few automotive camera customers in production and driving our CV revenues. So I think that's probably from the design point of view. I will say you can use probably half professional, half auto. And from the production point of view, I think majority is in professional security camera at this point.

Matt Ramsey (Managing Director and Senior Research Analyst)

Got it. Thank you for that. I guess in Casey's script, as delivered by Louis, you guys talked about the guidance for the current quarter being above what would typically be down seasonally, and we're kind enough to give the split of what's driving the quarter's revenue. Casey, if you have any thoughts about seasonality for the remainder of the year, as you see it now, is it typical?

Is it affected by supply constraints? I'm just trying to understand off of what was a guide that was considerably higher than I think a lot of us had modeled. How should we think about seasonality and your visibility through the remainder of this fiscal year? Just kicking off. Thank you.

Fermi Wang (President and CEO)

Yeah, over the last couple of years, there's been a lot of dynamics that haven't been typical as in the past. We had wave one is now kind of in full force, and wave 2 is coming in at the end of last year and coming into this year.And that, I think, will drive the change in dynamic that we talked a little bit about around our business in China, is also an impact. But on the other side of that, we're trying to look at the first half and the second half of the year and see what the dynamics are there.

So we're going to try to continue to keep you guys updated as we move forward. I don't know that we're going to have the same type of seasonality.We had a little stronger year, quite frankly, in the consumer side last year than we were expecting. We wouldn't expect to see that this year, but we'll have to see. As you know, we've said over the next five years or so, that's going to be declining or continue to decline. But it happened to perform a little better than we thought last year.

So I don't know that I would think about the traditional cycle going forward this year, but I think I would look at the dynamics that not only we're reporting, but others are reporting and try to factor that in. We also now have, as Fermi talked about, a pretty broad pipeline of activity in automotive that's starting to emerge, and that's new to us as well.So we're pretty excited about all of those dynamics, but I don't know that I would call it typical to our historical balance, if you will, over the quarters.

Matt Ramsey (Managing Director and Senior Research Analyst)

Thank you very much, guys. I'll get back to you.

Fermi Wang (President and CEO)

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

Tore Svanberg (Managing Director and Senior Equity Analyst)

Yes, thank you. And congratulations on the strong results. Question for Fermi. On the Motional design win, could you elaborate a little bit on that? Are you the exclusive for front-facing camera here? And should we assume that this is a multi-year design win, meaning you're sort of locked in for several years?

Fermi Wang (President and CEO)

First of all, I think that our chip is responsible for all of the video function perceptions, including the video processing as well as neural functions, and also serve both for the front camera as well as all the other cameras surrounding the car. In fact, with this current design, we have to use multiple chips per car. In terms of the length of the design cycle, I think for the whole lifetime of the shipment, we believe it's multiple years.

Because I think that for any vehicle, you should expect, I would say, anywhere between four to six years of shipment. We haven't heard from Motional given the guidance how long this product will last, but I believe that any vehicle should have that kind of period of service time.

Tore Svanberg (Managing Director and Senior Equity Analyst)

Very good. Congrats on that win. A follow-up for Casey. Louis talked about some pressure on gross margin because of higher input costs. Is this sort of it for now, or could there be some further pressure as we move throughout the year on the COGS?

Casey Eichler (CFO)

Yeah, we're going to have to look at what happens as well as for supply and what we've talked about or what Fermi talked about in the call. I do think that as we do more and more development in five nanometers, that does increase the development costs and increase the CAD tool costs and some of the other costs around being on the cutting edge. And that means we have to accelerate, as we talked about, not only hiring, but our development in some of these markets.

Tore Svanberg (Managing Director and Senior Equity Analyst)

Great. Thank you.

Operator (participant)

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

Matt Ramsey (Managing Director and Senior Research Analyst)

Hey, guys. Thanks for taking my question. I wanted to. This Motional announcement this morning is interesting. It kind of dovetails with what Amazon announced with their Zoox platform and robotaxis. I was hoping you could talk a little bit more about that specific market and what you think.

This is kind of starting to become a trend, and with automotive, I guess, where do you see growth coming from, or what's the growth trajectory like for robotaxis, both, I guess, over the next couple of years? I know maybe it's not something we'll count on this year, but can you talk more about that? It seems like you guys are becoming kind of a. There's becoming a bit of a pattern.

Fermi Wang (President and CEO)

Yeah. So our feeling is that I think the Level 4, Level 4 car, consumer cars continue to be challenging on the technology side as well as on the regulation side. But we do see that people continue to develop technology toward that direction. And we believe with this Motional announcement, there really is a first step that a truck, not a commercial vehicle, or it's a commercial vehicle going to that direction. I think that's definitely probably an easier way to get this technology into production.

And I do believe that this is going to become an important sector. And I think that eventually that's the most important market for us in the longer term. So we continue to invest heavily into this market and continue to invest heavily into our technology to enable our customers to do this kind of development.I think this is critically important, particularly on the perception portion that for visual perception.

I think that it doesn't matter whether it's a Level 2+, Level 3, or Level 5. I think the visual perceptions continue to become more and more important and people continue demanding higher performance for all of those applications. So that's definitely good news for Ambarella.

But also importantly, we believe that although the ADAS market, Level 2 and Level 2+ is a near-term opportunity for us, but we believe that later down the road, this type of Level 4, Level 5 cars will become probably the mainstream of business when the technology and the regulation are set for this market.

Matt Ramsey (Managing Director and Senior Research Analyst)

Very interesting. And the commentary on Dahua, getting some projects, was that surprising to you in Q4? And what does that mean, I guess, going forward for Dahua and your other big player in security Hikvision? Do you see something changing here where these guys are coming back in a more meaningful way, you?

Fermi Wang (President and CEO)

I think I won't say it's a surprise to us in Q4, but it's definitely a change from the trend we have been seeing for the last two years, right? We talk about that there's a dual supply chain, China and non-China dual supply chain happening, and we do see that the trend continues. But however, the Huawei or HiSilicon situation helped us to change that dynamic a little bit. And I do believe on this high-end CV market, we are, when the HiSilicon is not there, even in China, we have a very good position to provide solutions to our customers.

And Dahua is a great example.While I continue to worry about the dual supply chain development in China, but I do see that because of our differentiated technology, we got a chance to get into our Chinese customers, including Dahua and several others, by using our CV chip for their AI cameras.

Matt Ramsey (Managing Director and Senior Research Analyst)

Interesting. 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 and Senior Research Analyst)

Thank you, and congratulations on the great quarter. You had changed your outlook on the human vision or the video products growth for this year from flat to growing. Can you say what's changed there? Is it that these products have a longer tail than expected, or demand is up, or are you just getting more designs?

Fermi Wang (President and CEO)

I think there's multiple phases. One of the things is that we did talk about that the Hikvision, Dahua gradually digested their inventory level and came back to order more video solutions. That really is a positive surprise to us. Also that in this year, we do see there's a lot of customers that, for example, we take over some of the market share from our competitors that we talk about, also help in that direction. I think these two things definitely are the major reason that we changed our guidance a little bit.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Okay. Great. And also you mentioned on the virtual CES, you said 200 customers. Can you tell us what would be the normal number of customers you'd have in Las Vegas at your booth?

Fermi Wang (President and CEO)

Last year we were around 170. This year is around 200 plus, so that's probably in that range.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Okay. Constant increase in interest, and your pipeline is filling up.

Fermi Wang (President and CEO)

Yes.For new designs.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Great. Thank you.

Fermi Wang (President and CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Your line is now open.

Joe Moore (Managing Director and Head of Research)

Great. Thank you. Fermi, you talked about the wins in China driver monitoring. And maybe if you could just. Seems like in the European market that there's a much quicker path to revenue on driver monitoring than there is on ADAS. Is that also true in China? Could that revenue materialize kind of sooner than you might see in some of these other opportunities?

Fermi Wang (President and CEO)

There are two things I would like to mention here. First of all, we mentioned that our CVflow SoC will have shipped more than 300,000 units to the automotive market. And majority, if you look at the market, one is really the fleet market, the fleet management market. The other one is the OEMs. And if you look at the application, the majority of that 300,000 chips is going to the ADAS market. But however, I do see that in China and in Europe, we see many DMS and in-cabin monitoring solutions or design wins popping up.

And we have won several of them. And also we mentioned that some of them will be in production in China this year. And that's why you see what we're talking about at this point.So I think what I'm trying to say is DMS, in-cabin monitoring, ADAS will continue to be our short-term revenue opportunity for our automotive market while we continue to prepare solutions for level 2+ and above.

Joe Moore (Managing Director and Head of Research)

Okay. That's helpful. Thank you. And then separately on the Motional win, how does that relate to the funnel? And I guess, is that in the funnel at all? And then as you guys talk about the funnel and the revenue profile of the wins that you're getting, how are you thinking about Level 4 or 5 types of wins when it's so long until the revenue would actually start to kick in?

Fermi Wang (President and CEO)

Right. So it definitely is in the funnel. And we are talking to a customer, including Motional, about their guidance and also their expectation into production. So we definitely have a good idea. They're thinking on their production date and in terms of volume, so it's in our funnel. But like you said, this is a longer-term project that we have been working on for more than four years on this particular project.

And we expect that although the revenue is not going to be immediately high in this year, but we do see that when it's ramped up, it will give us a very good return in terms of investment. But at the same time, when we talk about our revenue funnel last year, we include everything we have visibility, right? So you can imagine that Motional was part of that funnel when we discussed last quarter.

Joe Moore (Managing Director and Head of Research)

Great. Thank you. Congratulations on the announcement.

Fermi Wang (President and CEO)

Thank you.

Operator (participant)

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

Vivek Arya (Managing Director and Senior Equity Research Analyst)

So firstly, I'm curious, what is the CV attach rate per car? I think you mentioned about 300,000 shipments cumulative. I'm curious how many cars does that correspond to? And were these shipments replacing what you were selling to the same customer before, or are these new applications or new customers? I was just hoping for some more color on that.

Fermi Wang (President and CEO)

Right. So like I said, for the ADAS or in-cabin or DMS type application, it's one chip per car. So the 300,000 chip means 300,000 cars. In terms of whether this is replacement, I think it's not because in the past, when we sell video processor, it's really for the DVR, and for the 300,000 automotive CV chip, we sold that into the ADAS market as well as DMS market, and I think that's a brand new market for us. So it's not a replacement for our video processor chip.

Vivek Arya (Managing Director and Senior Equity Research Analyst)

Got it. The next question, I think you gave the contribution from Dahua. I forgot whether you gave it for both Dahua and Hikvision for Q4. If you could just repeat what the contribution was in Q4, what you're expecting for Q1, and in general, how should we think about them in terms of contribution for this fiscal year?

Fermi Wang (President and CEO)

Right, so we talk about Dahua and Hikvision combined. It's like low- to mid-teens, low-teens total revenues for us this year, sorry, in Q4, and moving forward, I think Dahua will continue to be a strong customer for us because we talk about they not only clean up their inventory, but also their CV revenue is ramping up.

Hikvision, on the other hand, I think it's going to be a smaller customer moving forward because while they continue to digest the video processors, we haven't got design win from Hikvision on the CV side. Moving forward, I continue to see that the China security camera market is important for us, and Dahua will be our leading customer in there.

Vivek Arya (Managing Director and Senior Equity Research Analyst)

Thanks very much.

Fermi Wang (President and CEO)

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

Ross Seymore (Managing Director and Senior Equity Analyst)

Hi guys. Congrats on the strong results in guidance. Thanks for letting me ask a question. I wanted to dive into the automotive side. Fermi, you've had a couple of really good quarters in a row. I just wanted to blend what you're doing this year, where you said it's going to be the fastest growing area with the first, second, and third wave sides of things.

So how would you describe what's driving the growth now and the transition that's still driving strong growth in fiscal year 2022 before you get to the true wave three, which would be next year? So how do you see your business transition over that period of time and yet still deliver this strong growth?

Fermi Wang (President and CEO)

Right. So I think the strong growth coming from the multiple areas, first of all, the first wave CV helps tremendously. You can see that our CV revenue grows. Last year, we said $25 million. This year, we said it's going to be more than 25% of total revenue. And if you think that today, the analysts putting our whole year revenue around $280 million, so 25% of that was roughly $70 million. So just CV alone grew from 25 to 70.

And the growth mainly is in the professional security camera and also ramping up our second wave of our CV revenue, which is consumer IP cam. In the meantime, we continue to ramp up our more CV design wins on consumer IP cam as well as different vertical markets. We talk about access control. We talk about people counting markets.

There are different markets that we're going after with our traditional security camera design. That continues to give us growth. At the same time, we talk about our automotive market continues to have a stronger growth. I think that combination of current video-only solutions, for example, the DVR market continues to grow fast in Japan, Korea, and China. Also we just reported we have design win at Ford and Volkswagen.

You can see that even in the U.S. and Europe start adopting the DVR solutions, which is really our. I believe that we are the market leaders in that particular market. That continues to give us automotive growth. At the same time, we just report that we have accumulated a ship, more than 300,000 CV chip into automotive.That also is an indication that we're doing well and that we are on track to deliver our wave three in coming year, 2022 and 2023.

Ross Seymore (Managing Director and Senior Equity Analyst)

Thanks for providing that bridge. I guess one for Casey. I know you said seasonality doesn't come in on the revenue side so much, and there's lots of puts and takes there. But if we shifted down to kind of your general feeling on OpEx for the year, how are you thinking about that? Are there any big puts and takes to think about? How do we think about it relative to revenue growth, etc.?

Quinn Bolton (Managing Director of Equity Research)

Yeah. So I'd say SG&A is all fairly consistent with the exception that, as we've talked about in the past, we are investing in the sales and marketing area in Europe, obviously building out our capabilities there. And so that has been some additional expense or will be some additional expense for the year. Really, our continued driver is going to be on the engineering side.

Like I talked about with the 5 nanometer and the other costs related to doing these advanced technologies, there aren't many people bringing chips out at a pace that we are, that Chan and his team are doing successfully last year and continuing into this year. And that doesn't come without cost.

And that cost is we have to continue to build our engineering team, not only in the U.S., but in Europe and in Asia, as well as we need to continue to invest in making sure that we can tape out leading-edge chips to take advantage of the success that we're having right now. So those are really going to be the drivers.

And the engineering side, that's pretty consistent except for it's just getting more and more expensive. On the sales and marketing side, that's a little bit new. It's not a huge investment, but we are making sure that we have the opportunity to take advantage of all markets globally.

Ross Seymore (Managing Director and Senior Equity Analyst)

Perfect. Thank you.

Quinn Bolton (Managing Director of Equity Research)

You bet.

Operator (participant)

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

Quinn Bolton (Managing Director of Equity Research)

Hey, Fermi. Congratulations on the nice results. I wanted to ask sort of a longer-term question in the security surveillance market. Lots of puts and takes there. You're gaining share at Dahua and some of the Tier 2s. You seem perhaps a little less optimistic about winning CV at Hikvision. I guess, and then HiSilicon is obviously can't secure new semiconductor supply.

So I guess when you put all of that together and you look at it over the next couple of years, do you think your position to gain share in security, do you hold it flat? Just kind of what are your thoughts over the next couple of years about whether you can grow your share of that security camera market?

Fermi Wang (President and CEO)

Right. I think that in the next few years, the biggest transition for the security camera market is going to be transition from video solution to the CV solution, and we believe that we are in a very good position from a technology point of view to provide the best solution to the market, both China and non-China customers.

Outside China, I'm confident that we'll be a number one provider by far, and in China, because of our supply chain, we continue to see a competitor coming on the low-end side to compete on the CV solution, but on the middle and high-end side, we are probably the best solution even inside of China at this point, so I'm hopeful that we will continue to gain market shares in the security camera market when the transition continues.

And it's hard for me to predict how fast the CV revenue is going to ramp up. But just look at, we talk about two million units of CV chip shipment at the end of Q1, and the majority of that in a professional security camera. And I expect that the growth rate will continue to increase in a big percentage. So I'm hopeful that we're going to see a similar transition just like 10 years ago when the security camera transitioned from analog to digital. We are going to see a very similar transition from video to AI in the next couple of years.

Quinn Bolton (Managing Director of Equity Research)

Thanks, Fermi. And then one for Casey. Just as things get tight, investors always worry about double ordering. I'm wondering if you could give us any thoughts and if you're seeing any change in customer order behavior, whether as lead times are stretching out or these customers are more comfortable placing orders with longer lead times with cancellation penalty, meaning that these are pretty sticky orders. Just any comments you can make about your confidence in the orders that are coming in would be greatly appreciated.

Casey Eichler (CFO)

Sure. Well, as you've heard me say in the past, in environments like this, CFOs sleep like a baby, go to sleep, and you wake up every two hours crying. It's just really dynamic. And we go out, we have to dial up our activity with our customers. We have to continue those discussions. We have to be talking to our suppliers. And we have to try to map that together as best we can. As you've heard from everybody this quarter, that has come into play in the last quarter.

And I anticipate that we're going to continue to deal with that for the first half of the year.But to your question, really, is how much of that is going to carry out into the second half of the year to where people aren't ordering for capacity in the first half, but just making sure that they have enough to make it through the end of the year. And we're going to get better visibility like everybody over the next quarter. But right now, certainly, we're all dealing with those issues.

Our partners have been very good and have been very supportive, but it's also a very difficult environment, as you've heard. And so we're going to continue to make sure that we're communicating with our customers, trying to make sure they understand lead times and how we can best support them in what's going to be probably a challenging quarter or two.To your point, on the back end, you see how much of that was capacity and how much of that was inventory.

Quinn Bolton (Managing Director of Equity Research)

Great.

Fermi Wang (President and CEO)

Hey, Quinn, this is Fermi. I just want to add one more answer on that. Personally, we've all gone through this kind of environment in the past. I have no doubt that our customers try to build up inventory to protect themselves, which everybody should do under this environment. So it's our job to talk to our customers regularly to understand their true demands and trying to work together to prevent a different kind of problem down the road.

Quinn Bolton (Managing Director of Equity Research)

Thank you.

Fermi Wang (President and CEO)

Thank you. Our next question comes from the line of David O'Connor with Exane BNP Paribas. Your line is now open.

David O'Connor (Managing Director and Senior Research Analyst)

Great. Thanks for letting me ask a question. Maybe one or two follow-ups from my side. Firstly, Fermi, on the you talked about wins at Dahua, less so at Hikvision. You say that's taking longer or not as confident about that. Is there any particular reason why wins at Hikvision is taking longer? That's my first question. And then maybe a question for Casey on the supply chain. You mentioned it's tight. Have you secured enough capacity to continue to grow quarterly through calendar 2021? Thank you.

Fermi Wang (President and CEO)

Right. Let me answer the question about Hikvision first. I think that the U.S. supply chain situation is definitely a concern for Hikvision, and when I talk to them, I can sense that it's very sensitive to them that they want to secure a non-US component as a higher priority. I think that's probably the biggest problem we are dealing with at this point. Casey, you want to answer the second half?

Casey Eichler (CFO)

Sure. Obviously, in an environment like this, you're always trying to secure an appropriate amount of capacity. But it's also very fluid, and so where we're trying to make sure we have the capacity that we need not only for the first half, but the second half of the year, things change and environments change.

For example, what happened in Texas in the last few weeks is certainly something that's a dynamic that no one expected and impacts across the semiconductor environment. And so I think that we're doing the right things to secure the capacity we need for our customers, but it is fluid and things like that can happen.

David O'Connor (Managing Director and Senior Research Analyst)

Got it. 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 (Managing Director and Senior Research Analyst)

Hi, good afternoon. Just following up a little bit on the supply shortage. Are you constrained in your current quarter guidance, which sounds like it's supply-based relative to the demand and what you otherwise would be able to ship if there was no constraint? And is there a way to quantify this and maybe also for the full year? Since I'm assuming you probably have wafer contract for the rest of the year, how much you think you have secured in supply growth versus what the demand is?

Fermi Wang (President and CEO)

Right. So in Q1, I don't think we are supply constrained. And because, first of all, I think we buy wafer from Samsung, and I think they are a very good partner and continue supply to us. And also, in fact, the biggest shortage out there is packaging and the substrate. Our partner there is ASE in Taiwan. And also, we have strong relationships. So in Q1, our guidance is not constrained by the supply.

However, there's a curveball just being thrown at us is that all of you have probably heard that the Samsung Texas foundry was shut down because of the extreme weather. We just get it. I believe that the factory has gone back to operational, and they got the water and electricity.

And we are working closely with Samsung to size up the impact to the delivery.If there's any, that will be probably in a Q2 timeframe. We haven't really got a visibility on that yet. We will continue to work with our customers and also suppliers to make sure that we don't become the bottleneck for our customers.

Tristan Gerra (Managing Director and Senior Research Analyst)

Okay. So that's great color. And given the environment of PCB substrate price increases, are you able to pass on some ASP increases to your customers as well, or could that also be a factor we should be looking at in terms of your gross margin outlook for this year?

Fermi Wang (President and CEO)

I think our costs on the substrate definitely increased, but we have not passed it on to our customer yet. I don't think that's it; it's not a high-priority task for us yet. Also, all the guidance we give you in Q1 includes all of the costs we just mentioned.

Tristan Gerra (Managing Director and Senior Research Analyst)

Okay. Great. Thank you.

Fermi Wang (President and CEO)

Great.

Thank you. Our next 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 Eichler. I appreciate the computer vision revenue amounts and the guidance. But can you help us in the mix there of wave two consumer versus wave one professional? Would the ratio there when it ramps up be similar to the video, which was one-third consumer, two-third professional, if I recall, just to get a sense of the relative size of those two?

Fermi Wang (President and CEO)

Yeah. At wave two, fully ramp up, I think the ratio will continue to be similar in that range. And also, today, just because wave one just completed and wave two just started, I think the revenue split is still heavily favorable to professional security at this point.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Great. And my other questions, you gave pipeline data in the past few quarters. Do you have any updates to those numbers at this point, or are you going to do that intermittently?

Fermi Wang (President and CEO)

No. For the revenue final, we talk about that. We're probably going to give you annual update.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. All right. Great. Thanks, guys.

Fermi Wang (President and CEO)

Thank you.

Quinn Bolton (Managing Director of Equity Research)

Thank you.

Fermi Wang (President and CEO)

Thank you. Our last question comes from the line of Richard Shannon with Craig-Hallum. Your line is now open.

Richard Shannon (Senior Research Analyst)

Thanks, guys, for taking my questions. I'm going to follow up on the professional security. Fermi, you mentioned kind of yearly guidance, thinking about 280 top line of the quarter, that about 75 being from CV and most of it being professional security. That suggests it's going to be a good portion of professional security for the year, like maybe a quarter or a third, roughly speaking.

Do you have visibility on whether CV becomes more than half of professional security this year or soon thereafter? And then just kind of following on that as we think longer out, do you think the cycle of video to CV is that a similar timeframe as you have seen from analog to digital in the past?

Fermi Wang (President and CEO)

Right. So we haven't given guidance about the CV percentage of professional security camera. We'll consider that. But if you do the math, I think we are getting a higher percentage, and it's definitely become very meaningful for professional security camera with our CV revenue today.

And that definitely is growth because our video processor, like I said, last year, our video processor business has gone down only by 10%, but our CV revenue growth this year is going to be a lot more than that. So I do believe that we will continue to maintain video processor revenue while we're growing our CV revenue. In terms of sorry, I forgot your second part of the question.

Richard Shannon (Senior Research Analyst)

The trend from video to CV, do you see that happening in a similar kind of cadence as analog to digital you've seen in the past?

Fermi Wang (President and CEO)

I agree. I think that's the case. In fact, I just mentioned that. I think the transition from the video to CV, particularly in professional security camera, we're seeing it. I think that transition will be fast and will continue to accelerate it in the next couple of years. And in fact, one indication is the majority of the new projects that our customers kick off with us, they are all CV-based.

So I have no doubt that you're going to continue to see this trend in the next couple of years. Maybe when we transition from video, sorry, from the analog camera to video camera, there's a three years of ramping up very fast. I'm not sure we are in that phase yet, but I won't be surprised we'll start seeing that phase very quickly.

Richard Shannon (Senior Research Analyst)

Okay. Thank you for that detail. I'll pass along. Thank you.

Fermi Wang (President and CEO)

Thank you.

Richard Shannon (Senior Research Analyst)

Great.

Operator (participant)

Thank you. There are no further questions. I will now turn the call back to Dr. Fermi Wang for closing remarks.

Fermi Wang (President and CEO)

Yeah. I would like to thank all of you for joining us today, and I'm looking forward to seeing you next time. Thank you.

Operator (participant)

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