Ambarella Inc (AMBA) Q1 2020 Earnings Call Transcript — The Motley Fool

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( Ambarella Inc NASDAQ:AMBA)
Q1 2020 Earnings Call
, 4:30 p.m. ET

Contents:

    t

  • Prepared Remarks
  • t

  • Questions and Answers
  • t

  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Ambarella’s First Quarter Fiscal 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference, Mr. Louis Gerhardy, Director of Corporate Development and Investor Relations. You may begin.

Louis GerhardyDirector of Corporate Development and Investor Relations.

Thank you, Skyla. Good afternoon, and thank you for joining our first quarter fiscal 2020 financial results conference call. Our speakers today will be Dr. Fermi Wang, President and CEO; and Casey Eichler, CFO. The primary purpose of today’s call is to provide you with information regarding the results for the first quarter of our fiscal 2020.

The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth and demand for our solutions among other things. These statements are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements. These risks, uncertainties and assumptions, as well as other information on potential risk factors that could affect our financial results are more fully described in the documents that we filed with the SEC, including the annual report on Form 10-K filed on March 29th, 2019 for fiscal 2019 ending January 31st, 2019.

Access to our first quarter fiscal 2020 results press release, historical results, SEC filings and a replay of today’s call can be found on the Investor Relations portion of our website.

I will now turn the call over to Dr. Fermi Wang.

Fermi WangChief Executive Officer

Thank you, Louis, and good afternoon everyone. Before I address our financial results, I would like to comment on the geopolitical factors injecting higher levels of uncertainty and volatility into our business. Although there is currently no regulation in place, there is a speculation our largest security camera customer in China may become subject to US government regulations limiting or restricting our shipments to them.

In addition, some of our customers both in China and outside of China will be facing higher tariff when their products are imported into the US. During this uncertain times, market share may shift between our customers and as such transition could be subject to disruptions. Furthermore, our non-security cameras customer in China may also be subject to the unfavorable geopolitical forces.

Our largest competitor in the security camera semiconductor market, HiSilicon, a unit of Huawei may also face headwinds of their own. As a result, one can see the environment is volatile with a wide range of potential outcomes. For example, in the last two weeks, we have received orders pull-ins from security camera customer in China.

In terms of our financial performance in Q1 fiscal year 2020, the revenue of $47.2 million was slightly above the midpoint of our guidance and declined 8% from the $51.1 million in the prior quarter. During the quarter, we demonstrate a solid progress toward a multi-billion dollar expansion of our addressable market. Our deep domain expertise in video processing, integrated with computational horsepower of our proprietary CV4 AI processor, yields a highly optimized computer vision solution enabling our customers products to become more intelligent. An important milestone for us is that we started a mass production of our second CV SoC, CV25 in Q1 with shimmer scheduled in Q2. Also during Q1, we continued the early ramp of CV22 shipments and then tend to strong design activity in our core automotive and the security camera markets.

I will now talk about our progress in our target security and automotive market starting with security. During April’s ISC West security convention, Ambarella demonstrate its full range of IP security solution including our CV4 family of a computer vision SoCs as well was announcing our new S6LM SoC. As a show, many leading professional camera suppliers demonstrated their new AI enabled cameras based on our CVflow SoC in advance of a formal product announcement to be made over the coming months. This included a leading Korean supplier, Hanwha Techwin, who demonstrated professional IT cameras based on Ambarella Solutions for the first time. Our CVflow SoC are in design at the 9 of the 10 leading professional security camera suppliers. We are continuing to displace SoCs from HiSilicon and the computer vision co-processors including those from Movidius and FPGA-based solutions in new designs.

We also believe that around five professional IP camera makers should be in mass production of a camera-based on our CVflow SoCs in the second half of this year. During the show, we introduce our new S6LM camera SoC, targeting both professional and home security cameras. It includes Ambarella’s latest high dynamic range and a low light processing technology, highly efficient 4K H.264 and H.265 encoding, multi-screen streaming, on-chip 360-degree dewarping, cyber security features and a quad-core ARM CPU. Fabricated in 10-nanometer process technology, the SoC has very low power operation making it well suited for small form factor and battery-powered designs. Fully software comparable with our CVflow family of chips where S6LM expense our IP camera product portfolio to address the most cost conscious applications with no compromise on image quality.

In addition to our ongoing investment and progress in AI processing, we are continuing to advance our image processing technology which remains a critical differentiator in both security and automotive operations. At ISC West, we demonstrated the low light capability while our new SoCs by generating full frame rate color video in less than 0.07 lux lighting conditions or near total darkness. At these light levels, previously camera have had to turn on power-hungry IR LED for illumination, which provides only grey scale images. This new low-light color capability is available on all of our new CVflow and S6LM SoCs. We have now worked with over 50 customers and the partners who successfully port their deep neural networks to our CVflow SoC with our advanced tools typically enabling network porting in a few days. The number of leading third-party computer reader software develops first joined us at ISC West for demonstrations. This included AnyVision’s face recognition, FF Group’s vehicle and license plate recognition, Pilot AI’s person and vehicle detection, Trueface’s access control, IntelliVision’s license plate recognition and XNOR’s person detection and recognition.

In a consumer home monitoring market, Vivint, a leading smartphone company owned by Blackstone Group and serving over 1.4 million customers in the US and Canada, introduced its first Ambarella-based product, the Outdoor Camera Pro. The camera is sold as a part of Vivint’s complete integrated home security system and 24/7 monitoring services. Based on Ambarella’s S5L SoC, it includes a 4K sensor, 1080p video with HD zoom night vision, two-way audio and ability to both detect and deter threats.

I will now update you on our continuing progress in automotive markets. In April, Ambarella exhibited at the Shanghai Auto Show for the first time. We hosted a significant number of leading Chinese automotive OEMs and Tier 1 suppliers. Well, Dr. Alberto Broggi, General Manager of Ambarella’s VisLab team deliver the speeches highlighting autonomous driving technologies over 600 attendees. Our technology demonstration included our partner HELLA Aglaia front camera AI based ADAS software running our CV22 CVflow SoC. We also demonstrated driver monitors solutions from partners EyeSight and RealSense. The RealSense camera run on Ambarella’s new CV25 CVflow associate.

And yesterday we announced that we are working with leading Chinese Tier 1 supplier Longhorn to develop automated parking system based on a combination of a video and ultrasound technologies with sensor fusion software. The platform uses Ambarella’s CV22AQ SoC throughout multiple AI algorithms simultaneously to enable free space detection, parking detection, vehicle identification, obstacle type identification and emergency brake in a full 360-degree panoramic parking system. And yesterday we also announced a collaboration with Baolong, a leading Chinese Tier 1 supplier to the automotive sensor and ADAS market. Baolong’s DMS AIL was running on our CV22AQ SoC create a high performance, low-power and a compact form factor driver monitoring systems. The driver monitoring systems solution captures the drivers official information including characteristics of the eyes, head and the mouth following image sensor, and the CV22AQ provides real time both the video processing and AI computational horsepower to determine the drivers level of fatigue.

In April, we announced that we are working with China based Momenta on a collaborative HD mapping platform for autonomous vehicles. The combined solution leverage the broad CV22AQ SoC and then Momenta’s deep learning algorithm to provide HD map solutions, including localization and the map updates through cloud sourcing. The solution can create a close feedback loop of a big data AI and HD map update. We expect to extend our partnership with Momenta to include development of ADAS and level two plus autonomy solutions in the future.

Also in April, we announced that we are working with Chinese tier 1 automotive supplier Shanghai OFilm, the leading provider of smart driving solutions on automated valet parking or AVP hardware platforms. The platform uses Ambarella’s CV22AQ SoC and OFilm’s intelligent driving algorithms to perform high precision image recognition, free space detection and obstacle detection and enable emergency braking and map construction.

In the OEM automotive market, we have continued to win new designs in car recorder applications as this capability increasingly become a pre installed option in new vehicles. In the last two years, our drive recorder SOC have been incorporated into 18 new car models with 25 OEMs. This OEMs includes GD, Honda, Toyota, Nissan, SAIC, Dongfeng, Changan and the BAIC.

During Q1, a number of Chinese automotive customer introduced new car models with recorders based on Ambarella’s A12 SoC. This included GD’s Georgi MPV with the car recorder supplied by Tier 1 Longhorn, Chery’s Tiggo 7 Fly SUV with the car recorder supplied by Tier 1 Skyworth and BYD’s Song MAX MPV.

In the automotive aftermarket, Garmin announced its new mini family of a compact dash cameras consisting of a four new models ranging from $125 to $249, all based on Ambarella A12 SoC, the new cameras include features such as 14×40 resolution video, 180 degree field of view, parking security recording, and ability to link up to four cameras together to form a synchronized network that provides full coverage around the vehicle.

And in April, Ambarella’s Italian team VisLab obtained authorization to test autonomous vehicle on public roads in Italy. The first authorization to be issued by the Ministry of Infrastructure and Transport, under the new smart road decree. The authorization was obtained based on evaluation of VisLab’s technology, its proven experience in testing in real world environments and the vehicular safety records. Commemorating the occasion, Ambarella’s EVA autonomous vehicle was demonstrated to the Italian Deputy Prime Minister and the Minister for Economic Development on the iconic Torino Ligotto test track build on the roof of the formal Fiat factory.

And in the consumer camera market, drone market leader, DJI, introduced its Osmo action camera raising the bar for features and image quality in the action camera market. Priced at $349 and based on Ambarella’s H2 SoC, it offers 4Kp60 video recording, full frame rate 3-axis electronic image stabilization called the Rocksolid, video HDR processing and excellent low light imaging. The waterproof camera also feature a front-facing colored display to illuminate the guesswork when taking selfie.

In summary, despite the geopolitical headwinds, I’m pleased with our execution and the foundation we are building for the secular growth opportunity in the AI and the computer vision market. With multiple CV devices now in production, with more CV design wins and with new technology and products in development, we see three CV waves taking shape. CV revenue found a professional security camera market has started and we expect it to become material in calendar 2020. The second CV wave is expected for the consumer security camera market expected to commence in the second half of calendar 2020 has become material in calendar 2021.

The third CV wave automotive is expected in calendar 2022 to 23 with the potential to be the largest wave yet. I would like to recognize the Ambarella team for keeping their heads up and executing a plan despite all the macro uncertainty. Thank you to all of our shareholders including our 750 employees customer, vendors and shareholders for your trust.

Now I will turn the call over to Casey for the first quarter financial details and the guidance for our second quarter of fiscal 2020.

Casey EichlerChief Financial Officer

Thank you, Fermi, and good afternoon, everyone. Today, I’ll review the financial highlights for the first quarter of fiscal 2020 ending April 30th and provide a financial outlook for our second quarter of fiscal 2020 ending July 31st. During the call, I’ll discuss non-GAAP results and ask that you refer to today’s press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock based compensation expense adjusted for the impact of taxes.

Consistent with our previous guidance, our Q1 revenue totaled $47.2 million which represents a decrease of 8% from Q4 and a decrease of 17% when compared to the same quarter of the prior year. In Q1 revenue by market was in line with expectation. Automotive and other product revenue was up sequentially and security was down sequentially with consumer security increasing and professional security declining. Non-GAAP gross margin for Q1 was 59.6% compared to 60.6% in the preceding quarter and slightly above the midpoint of our guidance. Non-GAAP operating expense for the first quarter were $29.9 million compared to $29.5 million for the previous quarter.

OpEx increased primarily due to an increase in payroll taxes and other payroll related expenses. Other income of $2.2 million was higher than anticipated as we received $346,000 one-time government subsidy. Non-GAAP net income for Q1 was $266,000 or $0.01 per share compared to non-GAAP net income of $4.5 million or $0.14 per share in the fourth quarter. The non-GAAP effective tax rate in Q1 was approximate 36%. In the first quarter, the non-GAAP earnings per share were based on 33.5 million shares as compared to 32.8 million shares in the prior quarter.

Total headcount at the end of the fourth quarter was 750 with about 81% of our employees dedicated to engineering. Approximately 70% of our total headcount is in Asia. In Q1, we generated positive operating cash flow of $5.3 million. Cash and marketable securities were $366 million up from $359 million at the end of the fourth quarter. We did not repurchase stock during the quarter under the $100 million repurchase program authorized through June 4th 2019.

On May 29, the Company’s Board of Directors authorized the repurchase of up to 15 million of the Company’s ordinary shares through June 30th, 2020. Total accounts receivable at the end of Q1 were $26.5 million or 50 days sales outstanding. This compares to accounts receivable of $26.2 million or 47 days sales outstanding at the end of the prior quarter. Net inventory at the end of the first quarter was $17.6 million compared to $18.3 million at the end of the previous quarter. Days of inventory declined to 85 days in Q1 from 93 days in Q4. We had two 10% plus revenue customers in Q1, WT Microelectronics, a fulfillment partner in Taiwan, which came in at 59% of revenue; and Chicony, a Taiwanese ODM, who manufactures for multiple customers came in at 18%.

I will now discuss the outlook for the second quarter of fiscal 2020. Before the recent geopolitical news, we were comfortable with the market expectation for our second quarter fiscal year 2020 revenue outlook. However, due to recent order plans, we are now raising our revenue guidance above the market’s expectation. We expect total revenue for the second quarter ending July 31st, 2019 to be in the $51 million to $53 million range. We anticipate automotive and security revenue to increase sequentially while other revenue is expected to decline. We continue to expect other revenue comprised primarily of customer electronics products to remain volatile and decline as a percentage of revenue in the next two to three years.

Although forecasting is difficult in the current environment, we continue to expect our revenue will increase in the second half of the year when compared to the first half. The global economic and political environment is generating a significant amount of uncertainty with our customers outlook and our customers supply chains. Overall conditions remain extremely volatile.

A number of factors impact our gross margin outlook. In anticipation of export restrictions that might be implemented, our professional security camera customers in China have pulled in orders which are lower margin products. In addition, rising tariffs may have a greater impact on our customers ability to sell their products incorporating our higher margin devices. There is also some supply chain congestion in the packaging and test area that may make it difficult and/or more expensive for us to pull-in orders.

As a result, we estimate Q2 non-GAAP gross margin to be in the 57% to 59% range as compared to 59.6% in the first quarter. We expect non-GAAP OpEx in the second quarter to be between $29.5 million and $31.5 million due to increased engineering head count, payroll tax accruals and other engineering expenses. For Q2, tax rate should be modeled at 32%. The tax rate is a result of our inability to use tax losses in certain jurisdictions and the tax rate should return to the high single digit as we become more profitable. We estimate our diluted share count for Q2 to be approximately 34.1 million shares.

Ambarella will be presenting at the Bank of America Merrill Lynch 2019 Global Technology Conference on June 5th. The Stiefel 2019 cross-sector inside conference on June 10 and participating in CES Asia June 11 to June 13. Please contact Louis for more details on these events.

Thank you for joining our call today. With that, I’ll turn the call over to the operator for questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Kevin Cassidy with Stifel. Your line is now open.

Kevin CassidyStifel Nicolaus — Analyst

Thanks for taking my questions and congratulations. Just to be clear, on the pull-ins, these were because of HiSilicon and concerns of them not being able to ship it, it’s not a concern that the US may ban surveillance products or your products being shipped into surveillance products. Do I have that right?

Casey EichlerChief Financial Officer

Well, it’s hard for us to have perfect visibility into that. But I would say primarily the points are related to customers concern about — about a ban or potential ban. And so I think we’re seeing some order patterns as we’ve seen over the last quarter or so move around a little bit and we think that we’re already seeing some pull-ins into this quarter and that’s — that’s really what we’re referencing. From a HiSilicon standpoint, we may see some increased orders due to concerns around HiSilicon, but it’s hard for us to have visibility into that.

Kevin CassidyStifel Nicolaus — Analyst

Okay, thanks. And should we be thinking of the second half, I know you’re saying it’s still higher than the first half but maybe not as high as you were first thinking because the first half is going to be higher than expected.

Casey EichlerChief Financial Officer

I think what we’re going to see is movement kind of quarter-on-quarter over the next two to three quarters. We’re still — we’re seeing the type of traction we were expecting especially across the CV products and some of the other products. But as all of this gets digested and we try to get some resolution, it’s a little difficult for us to have as much visibility as we typically do, but what we’re seeing right now is pretty good demand and certainly demand better than we saw in the first half of the year and so that’s why we’re guiding second half over first half. But on a quarter by quarter basis, we’re going to have to keep you posted as we move forward because it’s difficult for us to have good visibility right now.

Kevin CassidyStifel Nicolaus — Analyst

Okay. Thank you very much for the clarity.

Casey EichlerChief Financial Officer

Sure.

Operator

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

Ross SeymoreDeutsche Bank — Analyst

Hi guys. Thanks for all the color and of this uncertain times, I appreciate you guys trying to give us a little more of a crystal ball. To that point, I know Casey you said you are comfortable with what The Street expectations were before. Just trying to size the pull-ins here. Is it fair to say that if The Street was at $49 million to $50 million, you’re thinking kind of $2 million to $3 million to hit the midpoint is the pull-in side of the equation or is there other things that are moving new design when something else that’s helping your business above the current expectations?

Casey EichlerChief Financial Officer

Yeah, I mean, most people had us starting to have some revenue growth in the second quarter with us the $48 million to $49 million you were talking about versus what we just did. And the incremental above that, again, it’s hard to have perfect visibility, but clearly a good piece of that is pull-ins that we’re starting to see into Q2. And so exactly how much of that is pull-ins is again hard to have a exact beat on, but it’s clear to say that a large portion of that additional above where The Street was is pull-in related.

Ross SeymoreDeutsche Bank — Analyst

Got it. And then, I guess, any more color you can give on the confidence you have in the back half of the year still being bigger. Obviously you have a lot of drivers there, but it seems like it will be less so to Kevin’s question given you have the higher base in the second quarter. Can you just talk about some of the things that you have confidence in that that will create that increase into the second half?

Casey EichlerChief Financial Officer

Well, as I said, our CV products remain on target and online. We’ve got some of the other products and some of the things that Fermi discussed in the call today that we think are going to really start to be contributors there and generally some of the markets that have been soft are starting to come back a little bit. Auto kind of lightened up a little bit. Security growth had sprung a little bit. And if you listen to our customers, they were seeing growth to start come back a little stronger in the second half. So that’s all good signs.

Now again, when you get disrupted in the visibility is that all of a sudden we’re not allowed to ship products or if you can’t get the supply chain straightened out for our customers. Obviously that’s very disruptive and we can’t control that but if borrowing something like that happen, I feel pretty confident and pretty good about what we’re hearing from our customers today.

Fermi WangChief Executive Officer

And also, this is Fermi, let me add one more thing. Before the discussion of this ban — potential ban of Hikvision, Dahua, Casey and I feel comfortable with our previous guidance which means that Q2 should be a little better than Q1 and second half will be better than — better than the first half. We feel comfortable even before this order discussion or the excitement of our Hikvision, Dahua situation.

Ross SeymoreDeutsche Bank — Analyst

Got it. Thanks guys. I appreciate it.

Casey EichlerChief Financial Officer

You bet. Appreciate it.

Operator

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

Joe MooreMorgan Stanley — Analyst

Great. Thank you. My question is on the pipeline of automotive wins, particularly in China, you guys have talked about the Shanghai OFilm, Momenta, Baolong, Longhorn now. It seems like there’s a lot more design wins coming from China than I would have expected. Can you talk about why you’re getting so much traction in that region. And you know obviously the Halloween in the West was pretty important as well, but is it sort of harder to get the Company that you’re working with in the West to press release those activities?

Fermi WangChief Executive Officer

Right. So first of all, I really think that HELLA’s announcement help us in China even because a lot of Chinese customer are waiting to get a platform they can use. And with HELLA — HELLA’s endorsement of our CV22 platform give the confidence to the Chinese vendor who are looking for solutions. And there was really like we talk about in the past in China people are more aggressive and they really want to get some product they can ship in 2020 and 2021 calendar years and there are not many good solution out there.

So with the endorsement of HELLA, as well as we continue to demonstrate — the pathways remains our CV chip and the performance and low power consumption all of that and image quality was just recently demoed, all of that help us to establish. I think that at the end, the Momenta we see in China really reflect that. Chinese automotive industry is more aggressive to try new solutions, as well as they are tied to a market, they’re tied to revenue is shorter than outside China.

Joe MooreMorgan Stanley — Analyst

Okay, great. And I guess a follow-up, is the competitive dynamic in the Chinese market different than here, I mean, here we talk about because like Mobileye and FPGAs and things like that. In China, is it — is it the same, you know we certainly hear about a number of AI inference related start-ups. So is that a different competitive set there?

Fermi WangChief Executive Officer

Yeah, first of all, I think between Chinese and non-Chinese company, there are probably 50 kinds of different AI company or start-up company trying to do inference engine like we are doing. But I still think that our main competitors is the people we talk about in the past, many Intel, Mobileye and NVIDIA and also the traditional company like NXP, TI and FPGA companies. I think when we show up with CV22 and the CV25 we believe we will establish our performers — especially our CNN performance as a power consumption better than the competitor we just talk about and also that because our existing cell structure and the customer relationship in China that definitely help us to get momentum going in China. On top of that, I think Mobileye, NVIDIA, although they are very big and they’ve very strong sales there, but their price is much higher than us in China. All of that I think help us to getting there. So we believe in China, we are competing with, like I say Intel, NVIDIA plus, TI and XP and the FPGA companies. I think that’s our main competitors.

Joe MooreMorgan Stanley — Analyst

Thank you very much.

Operator

Our next question comes from Adam Gonzalez with Bank of America. Your line is now open.

Adam GonzalezBank of America — Analyst

Yeah. Thanks for taking my question. Just a really quick one. Can you just quantify what your overall exposure to China is. I think we have a pretty good sense of what it is in security, but just trying to think beyond security and automotive (Technical Difficulty). Thanks.

Casey EichlerChief Financial Officer

Sure, in the security space, I think the question of the exposure to China, if you think about our professional security revenue, security overall is about 60% of our revenue and the professional side of that is about two-thirds with consumers security being one-third. Of that two-thirds, if you look at — if you look at our — if you look at our revenue in the security space alone, you’re going — you’re going to have a majority of our revenue coming from the export business and the export business — we have some internal as well but the export business is the biggest piece, but it probably represents 20% to 30% of their business.

So when you — when you roll all of that up, there’s a decent piece of our business in the security professional security business that’s sold by our Chinese customers, but almost of that is export and it’s a smaller piece of their business. The business inside of China is primarily our competitor HiSilicon.

Fermi WangChief Executive Officer

And also in auto space, I think that we talked about in our OEM car TV business, OEM recorded business really Japan and China. I will say — sorry, China, Japan, Korea and I rethink China is probably roughly 50% of that business. So that basically give you a idea of China exposure.

Adam GonzalezBank of America — Analyst

Great. Thanks for the color. And then on autos, Fermi, you gave some color on the timing of the three waves of the CV ramp that you see over the next few years and you said autos would really be material in calendar ’22 and ’23. Just wondering if you can give us an update on what you expect some of the near-term drivers to be in autos between the you know, I know it’s a 100% — almost the 100% auto recorders, drive recorders today. What can help bridge the gap between where we are today and the materials CV ramp three or four years from now? Thanks.

Fermi WangChief Executive Officer

Right. So we talked about 2022-’23, we talked about the non-China CV ramp. And as I just said, I think the — there will be a Chinese CV ramp earlier than 2022-’23 timeframe we talk about. For example, a lot of our Chinese engagement we announced that the time frame is really at 2020-’21. Although the value is not high but definitely it give us momentum moving toward that. But even before that CV wave — for ADAS, there is another wave which is DMS, Driver Monitor System, and we continue to see huge momentum behind this market and they — all of them moving to using a CN neural network with our CV25 chip for the next generation. So I rethink that we’re going to see another wave of the revenue coming probably 2020-2021 based on the DMS momentum.

Before that, I will say it’s all about video products recorder would be the biggest business, which continue to grow. We believe the total penetration rate is still low in China and we expect them in Chinese video recorder business will continue growing in the next two or three years. In addition to that, I think that we — in this time we talk about we have this strong view and also the smart parking system which is using — leveraging the surround view system with — plus CV22 object detection parking solution. So all of that will be incremental to our revenue in the next couple of years.

So when we say this, the auto wave is really referring to that, I think our West and ADAS customer can go into production and that will give us a big impact on our revenue. But before that I think all of those applications we just mentioned and also Chinese CV revenue will help us to bridge the revenue.

Adam GonzalezBank of America — Analyst

Thank you.

Operator

Our next question comes from Quinn Bolton with Needham and Company. Your line is now open.

Quinn BoltonNeedham and Company — Analyst

Hey guys. I was just trying to sort of better understand your sort of thoughts around the impact of the tariffs and the potential bans on security cameras and the current ban on Huawei. You’d said prior to those events you were comfortable with sort of the annual consensus estimates. Once those events happened, you’ve seen, it sounds about $3 million of pull-in into the July quarter which I assume would have otherwise been recognized later in the year. So I sort of understand that point of fact, but I guess my question is, do you not see any risk to the second half just from overall tariff uncertainty, the supply chain tightening inventories as a result and any potential ban of security cameras to the extent that those entities are placed on the US entity list?

Fermi WangChief Executive Officer

Well, that’s definitely a concern. That’s why we didn’t give any guidance on the Q3, Q4 second half, because all the risk you’re just mentioned. The only thing we said so far is before this discussion — before this potential ban being talked about, we were comfortable and after that, the only thing we come in was that we see Q2 pull-ins. We assume that if this geopolitical situation continues, we’ll see continued pull-in in Q3 until the ban starts. I hope it won’t, but if started (ph), it will definitely put more risk on our Q3, Q4 outlooks. But with so many uncertainties at this point we just don’t want to give any guidance for Q3, Q4 at this point.

Quinn BoltonNeedham and Company — Analyst

Got it. And then, question on sort of the exposure to some of the Chinese security OEMs that could potentially go on the entity list. I think in aggregate that could be roughly 25% of total sales. You had mentioned in prepared scripts I think for me that maybe it was only Hikvision that could go on that list. Could you — to the extent that it’s only one entity that goes on the list rather than multiple entities, would you be willing to share what the exposure specifically is Hikvision versus Dahua? Or would you prefer not to get that level of specificity?

Fermi WangChief Executive Officer

Well, we are not making any assumptions at this point. Both Hikvision and Dahua we mentioned in those media press and we are doing all kind of calculation assuming one to none or both. But at this point, we haven’t given any guidance of our potential impact if any of this scenario happens, we want to wait. Well, in fact, the biggest question is, entity list is one thing to look at but there are many other way that can the limitation can come from. So we just want to wait until the situation become clear that we will address the potential impact to us.

Casey EichlerChief Financial Officer

Just to add to that, should companies like Hikvision or Dahua get added to the list, the first thing we have to determine and obviously, we’re not waiting, we’re looking at that right now is whether or not the Ambarella solutions, which are developed and manufactured outside of the US, are they subject to the restrictions? And without knowing exactly what’s going on, we’re digging into that. But two things would have to happen, one is they would have to be put on this entity list and then we would have to make a determination and whether or not that impacts our products based on our back (ph) pattern.

Quinn BoltonNeedham and Company — Analyst

Got it. And then not to make all my questions about the potential of a ban, wanted to shift over to professional security. Do you guys have an estimate as to the number of AI-based cameras that would ship perhaps in calendar 2019 and calendar 2020 just to give us kind of a unit TAM so we can start thinking about what that ramp might look like? I know you expect material revenue from CV in 2020 in professional cameras. But just wondering if you might be able to give us kind of a unit TAM as you’re thinking about the market today. Thank you.

Fermi WangChief Executive Officer

Right. So right now only Hikvision has shipped many AI-based camera. In calendar year 2018, they say they shipped roughly 1 million units. In calendar year 2019, their forecast shows that they want to ship roughly 3 million AI-based camera, and they haven’t really give any indication for calendar 2020 yet. And so, between Hikvision and Dahua we believe they will be aggressive on the AI camera side.

On top of that, outside China we only talk about one of our customer that already ramping up their AI camera, and also we talk about totally we believe five of our CVflow customer will start shipping professional security camera by the end of year. So I hope this will give enough momentum on the supply point of view. But from the demand point of view, I rethink that it’s really depends on the pricing of the customer products, the aggressiveness of their pushing of technology and position the product. So with that, we’re waiting for more visibility from our customer about their short sales roll-out of those products.

Quinn BoltonNeedham and Company — Analyst

Understood. Thank you.

Casey EichlerChief Financial Officer

Got it.

Operator

Our next question comes from Matt Ramsay with Cowen. Your line is now open.

Matthew D. RamsayCowen and Company — Analyst

Thank you very much. Good afternoon. Fermi, just quickly on the longer-term you guys are continue to announce new TV chips and also, obviously, based on the TV flow architecture. And I just wanted to maybe get a little bit of an understanding with the engagements that you’ve gotten so far, what level of software investment those customers are making on top of the TV flow architecture, whether that’s your own investment, the customers own investment, any NRE payments that you might be getting to do that investment collaboratively and how sort of the software development on top of your platform and architecture is going for CV? Thanks.

Fermi WangChief Executive Officer

Well, that’s a good question because one thing we notice about all of our AI or CV technology development, software is probably the biggest investment at this point for both customer and us. In this — in my script, I mentioned one important thing, more than 50 customers and partners have a port their neural network onto our CV platform using our tools. And most of those networks — in fact, for each customer they probably port anywhere from two to 10 their own development neural networks onto our platform. And all — most of the network will be — can be ported in a couple of days. So that’s just show you efficiency and a number of customers are looking for this technology. And, in fact, more importantly, after they port their neural network onto our platform, they convinced themselves that our message to them in terms of power consumption performance and video quality are matching our — how we said in our spreadsheet. So I think that’s very important proportion of it.

And the other one is, in the last — in two calls before, I mentioned that HELLA ported their software onto our platform in less than three months, including neural networks and other applications on CV22 in less than three months, that just show you how — it is much easier than our customer’s expectations in terms of software structure and the portability for their software to go to Huawei platform.

The third thing you asked for is NRE. For the most of our automotive engagement, we are definitely asking for NRE to exchange for the support, software support, hardware support and maybe the ongoing system support for this long-term automotive engagement. And that — some will definitely show up in our financial guidance and will continue to show up in our financial guidance in the future.

Matthew D. RamsayCowen and Company — Analyst

Got it. Thanks, Fermi, that’s encouraging and really helpful color. I guess, as an unrelated follow-up, my — maybe my naive understanding of the CV opportunity was really in professional security cameras and in the longer term in auto and it was interesting to me today to hear you guys talk about the home security market as sort of the second leg of CV adoption. Could you talk a little bit about what opportunities you’re seeing from a home security standpoint and like how close we are to those transitioning onto CV?

Fermi WangChief Executive Officer

Right. So if you look at all of the reviews of the current consumer security camera, it doesn’t matter who is building with Ambarella solution or other solutions. The biggest concern is the accuracy of those alarms, most people trying to sell service by providing alarms, sending emails to the customer when they see something in the camera, and say, oh, there’s an alarm, you just look at it. But most of the alarms are false. In fact, there is some study shows that 95% of the alarms sending to the customer are through the customer security camera were false. And so, really the alarm — the false alarm becomes such a problem, in fact, at the end most of the consumer, including myself turn of those alarms. And the reason for that is that, AI using streaming of video to the cloud with a very small video resolution, didn’t give you the accuracy and the response that you need. So we all believe — when we talk to our customer, we all believe that pushing the AI or computer vision to the edge, so that you can apply CV on the high-resolution video without much any delay and making a real-time decision is the way to reduce the false alarms. We believe that with our AI technology we can help our customer easily eliminate 90% or more false alarms that we saw in our technology. With that, I think the alarm system will become useful and our customer can start really monetize their service from there. So that’s one of the reasons I think that our consumer IP can start adopting AI.

But at the some time, we also know that a consumer IP can go two extremes now, you see a lot of the $20 consumer IP can sold in Amazon. At the same time, you see people selling $199 with AI functions. So you’re going to continue to see this true trend. One go to high-end provide complete AI service at age (ph) or you go to total the other end, which is a very low-end, nothing just a pure video streaming. So you’re going to see consumer IP can go this two extremes and that will lead our CVflow is targeting to serve the higher performance and the higher gross margin product that we’re working on.

So, in terms of the timing of this product line, we start seeing a lot of design win activities and that’s why we mentioned that we’re probably going to see — start seeing people ramping up calendar year 2020 — second half 2020 and a material revenue coming in 2021.

Matthew D. RamsayCowen and Company — Analyst

Thanks, Fermi, for all the color. And all the best guys, given all the uncertainty out there. Thank you.

Fermi WangChief Executive Officer

Thanks.

Casey EichlerChief Financial Officer

Thanks Matt.

Operator

Our next question comes from Suji Desilva with ROTH Capital. Your line is now open.

Suji DesilvaROTH Capital Partners — Analyst

Hi, Fermi. Hi, Casey. Just a housekeeping question. What percent of revenues at this point is consumer legacy? Is it de minimis at this point or still material?

Casey EichlerChief Financial Officer

Yeah. We had said that we were entering the year in kind of the high-teens and that would be rolling down over the next, like I said, two to three years. And so, you can think that — again there’s going to be ups and downs, it’s going to be kind of lumpy because there’s less and less products in there, but over the course of the year, you can see that decline from that point down. So you can assume it didn’t make a dramatic change in the current quarter.

Suji DesilvaROTH Capital Partners — Analyst

Okay. And my next question, maybe a little unfair, I mean, there’s a lot of uncertainty, but also a lot of guidance on the call about computer vision. But are we at the point now where we can talk about in the kind of calendar 2020 time frame what percent of revenue that might be or the run rate or qualitatively? And if not that, what are the two or three things we should watch out for that can drive CV as a material part of the revenue in 2020?

Fermi WangChief Executive Officer

I think that it’s too early because our customer having gained mass production yet, I really think that milestone you need to watch is when our customer start announcing their products, that’s really when they start shipping and how many of them, what’s the pricing points, and that’s something we are watching anyway to give us an indication on the revenue stream we can expect next year.

Suji DesilvaROTH Capital Partners — Analyst

And Fermi, when do you expect that wave of announcements to hit, holiday season or…?

Fermi WangChief Executive Officer

I think it’s going to be later this year, early next year. CES might be a good time to look at it. But I think I expect a lot of announcement at late this year.

Suji DesilvaROTH Capital Partners — Analyst

Got it, great. All right. Thanks, guys.

Operator

Our next question comes from Charlie Anderson with Dougherty & Company. Your line is now open.

Charles AndersonDougherty & Company — Analyst

Yeah. Thanks for taking my questions and congrats on all the CV progress. I have just two quick ones. So one, you mentioned sort of obviously the change in behavior from the China security camera customers, the pull-in activity. I wonder, are you noticing any change in behavior or rhetoric from the customers who are using HiSilicon who could potentially got over to use. So that’s a question one.

And then question two is, if the appetite increases for pull-in activity from the China security camera customers, can you maybe help us understand how much you can maybe serve that increased appetite? You did mention there were some constraints on supply chain. So just want to understand the dynamics there. Thanks.

Fermi WangChief Executive Officer

Okay. So the first question is about HiSilicon. I think that we already start thinking, for example, we talk about Hanwha Techwin today, which was a HiSilicon customer and its transition to us, not only on the CV product but also on the video product. So that’s just one example. I think that outside China we do believe that we are taking over some of the HiSilicon accounts and we’re going to ramp up in the second half of this year.

In fact, that the other trend we definitely notice but we haven’t see big impact is that, Huawei has made it clear, they want to become one of the largest security camera vendors in China, which means they’re going to compete with Hikvision and Dahua. How does that impact their relationship and HiSilicon relationship with Hikvision and Dahua is something I tried to understand and see how they’re going to help us in the long run. That’s something is not clear. We haven’t see a clear indication yet.

So the second question is, sorry, I forgot the second question.

Charles AndersonDougherty & Company — Analyst

It has to do with your capacity to ramp up if the appetite increases for more pull-in activity.

Fermi WangChief Executive Officer

Yes. Thank you for reminding. For the — for example, you can see that, Casey talked about, we still have 80 days inventory, that definitely help us to address a portion of the pull-in requirement, and also that I think we have great suppliers that are willing to help us to do some urgent pull-ins from those wafer and the packaging testing point of view. So, so far we are — we think we can handle more pull-ins, but however, it really depends on whether this geopolitical situation continues and whether our customer continue to want more pull-ins in the next several months. So, we’re watching that very carefully, but we do have a strong inventory that can handle it, and also, we can prepare more if things continue to deteriorate.

On top of that, I think the things that we are watching the most is whether the packaging testing house capacity and whether the cost will go up if we’re having too much higher demand and that’s something we’re watching, we haven’t seen that yet but we worry that it might be the case.

Suji DesilvaROTH Capital Partners — Analyst

Great. Thanks so much.

Operator

Our next question comes from Richard Shannon with Craig-Hallum. Your line is now open.

Richard ShannonCraig-Hallum Capital Group LLC — Analyst

Hi, Fermi, and Casey. Thanks for taking my questions as well. Fermi, I think I got your comments regarding your success in auto recorders, I think you say 18 wins with the 10 OEMs. Can you give us some perspective of that market so far in terms of maybe your share, the volume we’re seeing with those customers? Are they add-ins or are the default selections, things like that, give us a view of how that’s going so far?

Fermi WangChief Executive Officer

We mentioned 10 OEMs and 18 models, all of them are — it’s either option or it’s default inside the OEM cars and that’s definitely one thing we are focused — one market we are focusing on. Our estimation is total penetration of that market is probably rough 10% in China, based on the number we can see. So we do believe there is a potential market growth — market share gain and so market growth that we can do in China, particularly that we continue to hear that government might put a regulation out to ask for some commercial car — even consumer car to have this function as default. If that happens — when that happens, I think that will really help the market growth.

And our advantage on this market in addition to our traditional video quality and the power consumption, I really think that the quality of silicon that we have auto-grade chip and also not only just a temperature but also get to AEC-Q level, ASO level and that which is a very good quality history with our current product line, I think that’s really one of the benefits that we enjoy in China right now.

Richard ShannonCraig-Hallum Capital Group LLC — Analyst

Okay, great. That’s helpful. My follow-on question. Fermi, if you want to look a little bit bigger picture longer term looking at the level four, level five opportunity, there has been a lot of discussion, well, there has been for a while but certainly this year about the interest and usage of LiDAR versus non-LiDAR approaches for level four, level five. I wonder what you’re hearing about those or the discussion out there in the industry and also maybe as that plays into the engagements on an interest in stereo versus monovision?

Fermi WangChief Executive Officer

Right. So first of all, we continue to believe level four, level five will be a long-term market for us. And we — but we still continue to engage the OEMs who are doing level four, level five, but our expectation is that, it’s more of a small volume production and also that some of the R&D project that we get involved with NRE and also building relationship technologies together.

In terms of LiDAR, and non-LiDAR discussion, we — when we done our EVA car, we didn’t put any LiDAR there. We believe that stereo is a good technology complementary to the other mono camera system. And we try to prove the concept that without LiDAR you can have level four, level five autonomous cars. However, like I say, if our customer coming to us says they want to use our CV chip with LiDAR, we would definitely work with them because this is a trend that — we are not going to compete in market trends. If the market trend says LiDAR plus mono camera, we’ll work with customer, if the customer come, we say, you want a stereo plus mono, we’ll work with that. We try to stay neutral on this discussion. However, we definitely try to prove the concept — the following concept that when the stereo processing work properly and with our technology, we want to show the people that stereo processing can be as powerful as LiDAR or even more powerful because the density — the power — the cloud point density that we can provide with that stereo cameras. So this is a whole job that we can continue to improve the quality of our stereo processing and hopefully, that we can demo in the near future that combination with stereo processing plus our CNN mono camera can be the main sensor used by the level four, level five cars in the future.

Richard ShannonCraig-Hallum Capital Group LLC — Analyst

Okay. Fermi, thank you for that detail. That’s all my questions.

Fermi WangChief Executive Officer

Thank you.

Casey EichlerChief Financial Officer

Thanks Richard.

Operator

Our next question comes from Gus Richard with Northland Capital Markets. Your line is now open.

Auguste RichardNorthland Capital Markets — Analyst

Yes, thanks for taking the question. Casey, in terms of the margin pressure in the current quarter. Can you give us a sense of how much of that is increased packaging costs versus mix?

Casey EichlerChief Financial Officer

This quarter, I think most of it is mix. Going out into the future, if there continues to be more pull-ins, then I think we have to go back and see what our opportunity is to get that done without any extra cost. And so, the extra packaging cost and test cost would really be a Q3 and forward issue. This quarter it’s really all mix.

Auguste RichardNorthland Capital Markets — Analyst

Got it. And then, when you think about the opportunity to gain share from HiSilicon versus the loss of opportunity because of tariffs and banning of customers. Can you kind of size those two relative to each others as there are more opportunity for you to gain share or more opportunity for you to lose business or are they about the same?

Fermi WangChief Executive Officer

Well, this is Fermi. As you can imagine that I asked this question in the Company many times, and we have many different models show different results. So at this point I really think that depends on your assumption. It comes to total different results at this point. I think the way we’re approaching this problem is, when we get more clarity in terms of — whether the ban is happening, two, whether the ban applies to our products, then we will really have a more — we can give you a more precise and definite answer to your question.

Auguste RichardNorthland Capital Markets — Analyst

Do you have a range?

Fermi WangChief Executive Officer

That’s quite wide.

Auguste RichardNorthland Capital Markets — Analyst

Okay. Thanks so much.

Fermi WangChief Executive Officer

Thank you.

Operator

At this time, I’d like to turn the call back over to Dr. Fermi Wang for closing remarks.

Fermi WangChief Executive Officer

Yeah. Thank you all for joining today and looking forward to talk to you next time. Goodbye for now.

Casey EichlerChief Financial Officer

Thanks.

Louis GerhardyDirector of Corporate Development and Investor Relations.

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

Duration: 61 minutes

Call participants:

Louis GerhardyDirector of Corporate Development and Investor Relations.

Fermi WangChief Executive Officer

Casey EichlerChief Financial Officer

Kevin CassidyStifel Nicolaus — Analyst

Ross SeymoreDeutsche Bank — Analyst

Joe MooreMorgan Stanley — Analyst

Adam GonzalezBank of America — Analyst

Quinn BoltonNeedham and Company — Analyst

Matthew D. RamsayCowen and Company — Analyst

Suji DesilvaROTH Capital Partners — Analyst

Charles AndersonDougherty & Company — Analyst

Richard ShannonCraig-Hallum Capital Group LLC — Analyst

Auguste RichardNorthland Capital Markets — Analyst

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