Q4 2022 Ambarella Inc Earnings Call
Good day, and thank you for standing by welcome to Amarillo fourth quarter and full year 2022 earnings call.
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After the presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to Louis Gary Hardy Corporate development. Please go ahead.
Thank you Liz good afternoon, and thank you for joining our fourth quarter and fiscal year 2022 financial results Conference call.
On the call with me today is Dr. Fermi, Wang President and CEO and John John Young VP of finance.
The primary purpose of todays calls to provide you with information regarding our fourth quarter and fiscal year 2022 results. 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.
The 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 that we file with the SEC.
Including the annual report on Form 10-K that we filed on March 31st 2021 for the fiscal year 2021, ending January 31, 2021, and the Form 10-Q filed on December 10, 2021 for the third quarter of fiscal year 2022.
<unk> ending October 31 2021.
Access to our fourth quarter and fiscal year 2022 results press release historical results.
SEC filings and a replay and prepared transcript of today's call can be found on the investor relations portion of our website.
Permitting will first provide a business update for the quarter and the full year John will review the financial results and then for me John and I will be available for your questions with that I'll turn it over to Fermi.
Lewis and good afternoon, everyone.
Thank you for joining our call today.
Fiscal year 2022 we presented an inflection here for ambarella with numerous milestones achieved.
<unk> revenue was $332 million was up 49% year over year.
CV revenue more than tripling to exceed 25% of total revenue and driving blended asps higher.
You want the first tier where CVP levered a material contribution to our operating result, enabling non-GAAP operating margin reached 19% versus 4% the prior year.
CV revenue way too small.
While home became material during the year as expected and we are pleased to announce that CV revenue from week three automotive also become material during the year.
This occurred.
A year ahead over the guidance <unk> provided in June 2019.
Turning to products, we expect CV fight our first five nanometer <unk> to begin mass production in the second half of fiscal year 2023, well.
While CV three or six five nanometer is youll see a $10 billion 10 billion transistor automotive domain controller tape out and is expected to simple this year.
There is a strong and broad based demand for our CV products.
At the end of the year, we have accumulatively shipped more than six immediately see the ACO six to more than 275 unique CV customers across many verticals.
Looking to fiscal year 'twenty to 'twenty three.
Geopolitical and the public health headwinds persist.
And the market forecast curious, particularly real global GDP in the semiconductor industry growth rates will decelerate.
There is a continuation of the supply chain challenges.
And in February we were informed our 14 nanometer supply from Samsung will be constrained at this time, we anticipate an adverse impact to our video processing revenue of approximately $5 million in Q2.
Despite these headwinds we see the secular forces a form of digital transformation is remaining very strong.
In particular demand for our deep learning AI processors for I O T endpoint.
Your tier one customers these activities not on CV, and we expect that CV revenue to reach 45% of our total revenue in fiscal year 2023.
Driving a further increase in our blended average selling price was a fewer older lower ESP video processors are shipped.
Now I will provide some he presented to market and <unk>.
Market development activity during the quarter.
We have a real wrongly people first week of January hosting our annual technology showcases how queuing CES in Las Vegas, and announcing all new CV three AI domain controller.
We have over 35 lives technology demonstrations, including our latest Eva autonomous vehicles ocular radar technologies longing, both automotive and security applications.
Numerous Iot robotics, and the polymer demonstrations the automotive part of the demonstration, including paid us implementation false sulfate promise auto brands and helped our AI as well as driver monitoring demos policy machines and CPO.
Old Ronnie I'll I'll see before <unk>.
On January 4th we launched CV three O AI domain control the asos family for single chip multi sensory perception infusion in past plenty in Adas level four autonomous vehicles.
Scalable poly efficient CV pooled family of Asos. He provides a top automotive industry hires AI processing performance and up to 500, etops, representing a 42 times increase.
So CV true and 160 times CV talk to you too.
The first CV three family member is fabricated and find nanometer process technology and enables centralized single chip processing for multi sensor perception, including high resolution video radar, including ocular sulfur and although since modalities.
It's a unique hardware scalability allow automakers to unify their software stack.
Their entire product portfolios, while reducing the cost and the complexity of sulfate your phone.
We have received significant interest in CV, three from leading automotive Oems and tier tier ones Pablo Isla announcement.
In addition to automotive applications, we will be developing see me three asos derivatives pocketing, although markets, including security and camera and robotics applications. This you see me three from me. So six well language, Inc. Increased performance over the CV three surgery allergic see before architecture.
Which provides over three times, the pollyfish, Nancy or the previous CV to generation.
In January we announced our new occupation intelligence image you seem a processor.
This new ISP architecture, you knew that works to augment the image processing down by the hardware ISP integrated into our see behavioral fees.
Demonstrating its life.
During the show showing full frame rate HD video capturing on the 0.03 locks lighting conditions almost complete darkness.
We believe this technology will begin changing in all of our market.
Higher quality video data not only improves visibility is in human viewing applications, but also improves the accuracy of AI processing on the challenging logging conditions.
During the quarter, we made a number of automotive polymer partnership announcement, we announced a collaboration with auto brands.
Although self learning AI assistant.
Assisted and autonomous driving to deliver a scalable range of AI solutions, ranging from eight hours to a higher level of autonomy will automate automotive mass market.
Show, we demonstrated the auto brands Abi Soviet Ronnie all singles CV, two eight automotive ACC. The collaboration will deliver high resolution flung Adas solution targeting compliance was a five star uncapped tenders.
We also announced a partnership with C machines, the industry's leading computer vision technology company with driver monitor applications and we demonstrate the seamless sulfate Rodney Hall seafloor AI platform.
Polish it will enable the delivery over complete integrated DNS and Adas solution.
We're also seeing new opportunities in automotive applications employing.
Cameras for security access control and customization or personal settings.
During the quarter held I introduced its Genesis GB 60, SUV with a face connect feature that is becoming a nice driver space open and the clauses vehicle doors and provides customized setting for the driver using near infrared cameras and deep learning technology.
Phase III collision module is based on Android in the CV quantify Ecu automotive asos.
Also during the quarter. We began began shipments always first consumer H E. B all want S and it's the first commercial vehicle the new E. D. V 280 lever event designed in close collaboration with Amazon.
Announced by really in all of our family comprised to all the all what S ended all warranty has 71000 vehicle pre older. While Amazon has placed an initial order for.
Hundreds of thousands of events.
Both our S E T V. So hungry have a Pam.
We're a firewall based on ambarella solutions with multiple controller CV to ACO cease being utilized for medias autopilot cold quite robust.
Skier guard and Sahrawi assistance.
He says 100th event also includes diary of forward facing cameras enabled by <unk> stereo processing capability.
Rapid design and deployment of this vehicles. In addition to our other automotive product production, which reflects the maturity of our CV for <unk> and the development tools.
In February the U S Department of Transportations National Highway traffic Safety administration issued a final rule, allowing automakers to install adaptive driving being O a T V.
The lights on.
Vehicles, but that adaptive driving being halite systems are useful for distance elimination of pedestrians animals and objects, we love, reducing low visibility opus drivers in oncoming vehicles.
The use of cameras with AI based perception to intelligently control that haleigh beans, we presents a new opportunity for ambarella see before he's on sheet.
In December we announced early.
In this area was Chinese automotive video technology company has called vision and I am autos.
Automotive.
Technology company jointly created by Asa ICEE ICEE group Lunging Hy Tech in Alibaba group as well.
The 2021, Shanghai Auto show I am older models announced its new also the electric vehicle would you begin sales in February . It includes our intelligent D. O P lighting system piece of our C V 22, Ecu automotive asos.
That can perceive the trading environment and provides a visual warning to perpetuate Oswald autumn automatically adjust the width.
Things on the narrowing Gulf conditions.
What was on China, I do every quarter I can and easy vehicle joint venture between GAC group and electric car maker meal introduced is the old suites ACB.
The old three includes a heightened paolo to an intelligent driving assistance systems based on our CV to Aqa's Oc and supplied by tier one maxi I.
Well I will talk about some of our Iot customers product introduction during the last quarter.
In the enterprise camera market, Motorola solutions announced expansion always licensed crazy confirmation portfolio with the introduction of the L. Six cube camera based on our CV 25.
L. C. L. Six Q can accurately scan vehicle moving at up to 75 miles per hour and up to 70 feet away.
It can be powered by battery solar panel or AC DC power and can operate in complete darkness.
Also even enterprises and public market being caught with cargo introduced each of CV 42 in the CD 52 don't camera off space, all CV twenty-five Sophie.
And the Panasonic IPO sensing solution introduces IPO, meaning a versatile network camera piece of our <unk> 22, a sushi.
Even small holdco market Comcast introduces first.
Video doorbell.
The video doorbell face are always so see you support to a D. Ph D video quick Crystal clear night vision and the wider for full two three aspect ratio, but allows you to see more of your doorstep.
He was still market ubiquity introduces key for Toby a pool.
Wi Fi enabled video doorbell was a prudent primary finding a pixel camera and a pick up.
Hey, megapixel package okay.
And ubiquity also began shipping its AI 360, <unk> camera, which provides ironic, whereas the villas and is based on all the senior tranche of licensee.
We're also seeing opportunities in new AI camera, Iot applications, including robotics and the video conferencing.
During CES HMS and factory automation company pacing, Japan announced and has demonstrated its new scenery three D camera designed for robotics and industrial for your occasions.
In this application abroad, CV 25, Soc equals a camera perception and fusion combining the RGB camera and a T O F.
Doosan do sensors.
Products being supply to Japanese robotic leader, yes, kawa for robotics, you all applications.
And the in Videoconferencing application example of one of our first wins is forming a Chinese based leader in communications and video conferencing.
Our new UV for thirdly serious ultra HD P. T V video conferencing camera based on all CV twenty-two ACO seat offers full K P. 60 video twenty-five ex obstacles, you'll have a pen kills oil operations.
In summary, this engagement, indicating we are successfully leveraging our stays or abroad.
Oh, the art human viewing video processor expertise into market for high bandwidth AI processors machine sensing Iot endpoints.
Much of the early CV growth, we have experienced has been driven by new product cycles in existing markets like security cameras.
But we are extremely excited about the penetration work achieving in multiple new marquee verticals.
Robotics, all automotive he lamp or automotive access control mentioned earlier.
The Mega trends for security safety automation, and eventually complete autonomy over robotics are key drivers of our market and it is a key driver for our St expansion, increasing from about $4 billion. This year to approach $10 billion in calendar year 2027.
So breadth of all sync expanding the market opportunities are now much larger we're engaged in discussion on multiple customer.
The lifetime revenue of 81 program could be more than 20 at tier one.
We have experienced in the past.
With evidence mounting we are more convinced in the positive secular trends of our AI upon us.
In order to sustain and grow our leadership position, we have and will continue to make our premium investment in differentiated semiconductor and software R&D.
Organic R&D investment leads the way and has been augmented with our synergistic acquisition of HD readout leader ocular.
Our R&D investment included new perception technology wellness diffusion for cameras and radars automotive functional safety next generation processor on three or four nanometer technology and silver modules higher up the stack.
And also I would like to provide the update our ocular about four months after we announce an acquisition.
Well, we're pleased with customer interest and activity was a proprietary HD radar products and the many cross selling opportunities will discussed was customer can see it this year.
Since the acquisition, we haven't seen a significant pick up in a number of our radar modules customers. In fact still in Q4, we shipped a record number of 77 gigahertz radar modules.
Understand many of these customers are evaluating the technology for their production programs and we plan to continue to aggressively hire to support the strong interest and outlook for our HD radio technology.
In conclusion after five plus years H AIG investment fiscal year 'twenty to 'twenty, two we presented affirmed inflection.
Okay.
And the Hoyle decisively established what's still in the very early inning over the ear Iot market development, well very pleased with our progress evidence continues to build and we've been called is the market opportunity is very significant.
We are committed to sustaining our strong investment to capitalize on our leadership position and along the way we are committed to deliver positive operating leverage after the $500 million and the $1 billion annual revenue milestones as indicated during our capital market days in January .
With that John will now provide our prepared the financial comments.
I will review the financial highlights for the fourth quarter and the full fiscal year of 2022, ending on January 31, 2022, and provide a financial outlook for our first quarter of fiscal year 2023, ending on April 30th 2022.
I 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 have eliminated stock based compensation expense and acquisition related costs adjusted for the impact of taxes.
Fiscal year, 2022 revenue increased 49% year over year to $331 $9 million.
Security camera revenue was close to 65% of total revenue up more than 50% year over year.
Auto revenue more than doubled year over year and represented almost 25% of total revenue.
Our other business declined roughly 20% year over year to represent slightly more than 10% of revenue.
For fiscal year 2022, non-GAAP gross margin was 63, 4% up from 61, 4% in fiscal year 'twenty one.
Despite some higher costs and expenses, our customer mix and product mix improved in the pricing environment was relatively stable.
non-GAAP operating expenses increased 15% for the year with the majority of this increase in our organic R&D investment.
For the 14th consecutive year, we reported positive annual operating cash flow, which was $38 8 million in fiscal 2022 with no debt net cash on hand totaled $171 million at the end of the year.
Q4 revenue of $92 million was slightly above the midpoint of our guidance range with CV ending the year on a strong note.
Q4 revenue declined 2% sequentially well above the five year average of down about 10% sequentially.
With several new video processor and computer vision programs commencing production auto revenue increased more than 30% sequentially security camera and other revenue declined about 10% sequentially.
non-GAAP gross margin for Q4 was 64, 8% above the high end of our guidance range of 63% to 64%.
Despite some increased costs the more diversified nature of our business are relatively stable pricing environment, and a richer customer and product mix all contributed to the strong gross margin performance.
non-GAAP operating expense for the fourth quarter was $43 million compared to $35 $6 million. In Q3. This was slightly above the midpoint of our guidance range of $39 million to $41 million.
non-GAAP net income for Q4 was $17 $9 million or <unk> 45 per diluted share compared to $22.2 million or <unk> 57 per diluted share in the third quarter.
In the fourth quarter. The non-GAAP earnings per share were based on 39 7 million shares.
Total head count at the end of the fourth quarter was 899 with about 82% of employees dedicated to engineering most of whom are focused on software approximately 65% of our total headcount is located in Asia.
In Q4, we generated positive operating cash flow of $26 million.
Yeah.
Total accounts receivable at the end of Q4 were $44 $5 million or 45 days sales outstanding in line with the 45 days.
Outstanding at the end of the prior quarter.
Net inventory at the end of the fourth quarter was $45 $2 million or down about 4% in dollars from the $47 million at the end of the previous quarter.
On a days basis inventory increased to 128 days in Q4 from 118 days in Q3.
We had two customers represent 10% or more of our revenue in Q4, WT microelectronics, a fulfillment partner in Taiwan, we shipped to multiple customers in Asia came in at 59% of revenue and our couteau distributor for automotive customers in Japan came in at 12% of revenue.
Revenue from Darfur anti collision declined more than 60% sequentially and more than 75% on a year over year basis and represented about 2% of total revenue in Q4 and 6% for the year.
I will now discuss the outlook for the first quarter of fiscal year 2023.
Underlying demand remained solid but support but supply side conditions are highly dynamic first as for me indicated our lead times remain extended and we are now facing new challenges and uncertainty with regard to our suppliers timing of deliveries for our 14 nanometer video processors.
<unk>.
Some of our customers have experienced significant delinquencies from other component suppliers as a result, some customers may choose to defer our shipments other.
Other customers may build inventory of our ssds as they await a complete kit.
We are also prepared for a potential public health locked down in Hong Kong, where our main warehouses located by arranging alternate delivery routes to our customers.
To the best of our knowledge at the current time, our guidance contemplates these new and existing supply chain challenges.
Considering all these factors, we expect our Q1 results to be better than the 9% average sequential decline experienced in the last five years.
We estimate our revenue to be in the $88 five to $91 $5 million range.
Or approximately flat sequentially at the midpoint.
After a surge in demand for several new programs in Q4 auto revenue is anticipated to decline sequentially.
With Iot revenue increasing sequentially.
As indicated at our January 4th capital markets day, given our strategy and the related changes to our business going forward, we will be reporting in two revenue categories automotive and Iot.
We estimate Q1, non-GAAP gross margin to be between <unk> 63, and 64%.
We expect non-GAAP opex in the first quarter to be between 41 and $43 million with the increase from Q4, primarily coming from increased engineering headcount payroll tax accruals and other engineering expenses.
The Q1, non-GAAP tax rate should be modeled in the 3% to 6% range.
We estimate our diluted share count for Q1 to be approximately flat sequentially.
Ambarella will be participating in the Morgan Stanley TMT Conference on March 9th and 10th the 30 <unk> Annual Roth Conference on March 14th and Bank of America's 12th annual Global Automotive Summit in April during Q2, we will also be hosting virtual demos from our recent CES exhibition please contact us for more detail.
Yes.
Thank you for joining our call today and with that I will turn the call over to the operator for questions.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
Since around around that.
I mean, I guess the first one is in the prepared script. It sounded like there was you guys found out in pretty recently and theres going to be sort of a $5 million impact I think you said Q2, maybe you could clarify that how long you.
Do you like that type of or magnitude of impact might be.
Continue to be a headwind into the back half of the fiscal year and I guess the other part of the question is does that mean that you're not yet seeing any of that impact in the guidance for April .
Well I think look.
The guidance, we just provided for Q1 has to consider all of the potential impact.
We noticed this problem after Chinese new year, we have communicated with.
So many many times sure the last few weeks to identify potential impact and our conclusion is that our Q2 revenue will be impacted by.
Approximately $5 million and we're still working hard to are all central to secure second half supply and we believe our Q2 might be the worst case for the whole year, but we still need to confirm the.
<unk> GA with Samsung for Q3 and Q4.
Got it thanks for me.
Yes.
Other piece of the question around supply is is more around the longer term I mean, you guys have worked with Samsung.
Really since the birth of the company and Ambarella is there any change that happened on their side that causes a supply disruption or do you get the feel that you.
You're getting the priority with your supply partner that you would we would like.
Or are there any changes to that dynamic and are you considering going forward any other sources.
Under capacity.
Well I think all of these relationships. So still very strong I think that I think you'll probably notice that the 40 nanometer.
So far that we talk about is is a sin.
A part of life that we had a problem last year with Central Texas foundry.
No problem. So I think that one of the reason that this pop up is if theres any supply change, we really have no inventory to cover the.
The completion of the problem. So I think that we still get a high high priority for Samsung, but I think this shortage of 14 nanometer in Samsung severe and I would just continue to see the result of that.
In terms of considering second source.
Either working on five nanometer right now and any.
Any tape out regardless, the ALDA engineering cause any table is a $15 million is going to be a very costly proposal. If we want to consider seconds or so at this point that I think we would like to understand what happened and Samsung and tried to work out the the ketchup plan so that we don't.
This will CV strictly in the future, but at same time I feel that the sensor was working hard to work with us.
To reduce the impact.
Got it thanks for that and just for my last question on you mentioned that.
As you look into the April quarter. After some some stronger results in the last couple that'd be automotive revenue might be down sequentially slightly.
Maybe you could talk about the drivers of that sequential revenue decline and how do you think the automotive business is going to trend for growth for the full fiscal year. Thanks.
Well first of all I think I think of our automotive business continues to be strong this quarterly reductions like seasonal but also reflect last year. We have a multiple project products ramping up at the end of year I think that the ramping out really trigger a big surge demand and now we're starting.
The regular run rate. So I think that combination of sizzle out here. This is a reason, but I still believe that automotive business continued to are performing strong.
Got it thanks for me and I'll jump back in the queue.
Yeah.
Our next question comes from Gary Mobley with Bells Fargo.
Hey, guys. Thanks for taking my question.
Wanted to focus a minute on the demand side of the picture.
For me you seem to be hedging a little bit in your prepared remarks talking about decelerating industry trends and so what I'm curious to know as you know to what extent is sort of a flattish revenue trends you're expecting to see for three consecutive quarters, albeit you know better than seasonal.
Impacted by supply and to what extent is it impacted by demand in other words I guess, the most weight directly I can ask the question is did backlog grow during the quarter.
We still see very strong demand.
Particularly on the CV side, you know we feel strongly that we have great momentum CV and we continue to believe believe that our CV revenue will be more than 45% of this year's total revenue and from.
From that point of view I think we feel confident that we invest heavily on that direction and we believe we're going to get pay off for that investment.
From the from the supply point of view 14 nanometer has hasn't been a problem for us pushing sense all of us for more than 18 months now so I hope that when the the overall industrial shows supply becomes better and this probably wont go away with us and we haven't.
Or any other process no or any other product lines, we have not seen any.
Supply issues for Samsung.
Okay on the on the threat of supply chain issues I wanted to ask about what your Guinea produced at Samsung Korea presume almost everything CV is in Samsung Korea are you seen any any constraints on that particular fab.
I feel just like any other fabs the fabs around the globe are very tight and we believe that the Samsung Korean fabs tie too, but we are convinced to that at this point, we will not have any shortage on our CV.
Our supply chain.
Got it thank you guys.
Our next question comes from Ross Seymore with Deutsche Bank.
Hi, guys. Thanks for letting me ask a question.
It's nice that you sized that $5 million impact it's not.
Not fun to have to have to deal with that but any sort of sizing about the supply side impact if any on either your fourth quarter that you just reported or the first quarter you're guiding to.
I don't think there's any impact on Q4 and Q1, we've just realize this problem at all just a few weeks ago. So we're dealing with immediately by disclose to our investors. So that you know.
<unk>.
Sure, we keep the potential impact of the size of impact as it was a timing impact so our investors can.
On the centre Australia.
Great. Thanks for that for me and I guess, just my one follow up.
Non CV revenue it looks like it grew about 25% last year, which is really impressive can you just talk about what the drivers of that growth would be and do you see them continuing this year ex the supply limitation I just wanted to figure out what sort of growth rate. We should think about for the the part of the business. That's not included in the 45%.
CV.
Right. So last year the growth the non CV revenue growth, mainly come from the security camera and automotive, particularly a lot of automotive growth cancel.
Now the.
The non CV part of life and this year are about hardware last year I also want to note.
Make a note on the we continue to.
Lose business for a while we have been documenting the the union number of drop in fact, the only chance.
Script. He talk about that are we going to see go from 6% last year total revenue for HIFU can go down to even lower level. So I think from the from that point of view the the.
Non CV revenue will continue to have a pressure because hydrogen power, but also I think that Oh C. V. Bottom line also replace some of the the video part of life. So I don't expect.
The video part of the line grew another 25% this year.
This shortage from 14 nanometers all video process.
The processor, which is non CV and they'll continue to put pressure on our non CV revenues.
Do you expect the non CV revenues to grow this year.
I don't think so.
Okay. Thank you.
Yeah.
As a reminder, if you'd like to ask a question at this time that is star then one.
In the interest of time, we ask that you limit yourself to one question and one follow up.
Our next question comes from Andrew Buscaglia with Bamberg.
Hey, guys.
Yeah, maybe if you could talk a little bit about on the margin side you had a great.
Gross margin quarter, but.
Operating margins were a bit lighter than I was expecting I only because it looks like some of your.
Operating expenses were a little bit higher how much how much was that.
More so.
Sort of self inflicted versus anything supply chain related.
Well there are some supply chain related the issue because I think the costs continue to go up not only just on wafers packaging testing even.
Even delivery the older cars is going up but however, I think that the main driver of our operating expense growth is always on the R&D side. In fact that you know we pay about our CV three chip that R&D expenses on the <unk>.
Piece of I T side as well as the.
Contractor side is definitely higher because there's such a huge chip and we work very hard.
To put our resource to solve that problem. So definitely that's our orange our operating expenses will be driven by our continued investment on the premium R&D, including the the actual final millimeter, maybe even 40 nanometer tape out and also tools and also continue to hire further engineer.
Engineers in the future.
Okay.
Okay, and then maybe.
One more on automotive.
Just with the guidance for Q1.
You made some comments about customers, maybe choosing to defer shipment was that specific tier automotive and then and.
And it just kind of what's your confidence in that.
The demand versus a few weeks ago being there this year than it was.
Prior to some of the stuff that's come to light.
I don't think the demand changed.
The last several several months or several weeks.
The biggest change is I think everybody is seeing that the automotive industry continue to have a supply of probably not only our supply problems, but also the other materials right. In fact, we continue to see all customer cannot build the product because of the lack of other components microcontroller for one so I think that's probably the biggest.
Variable we are dealing with that.
Obviously with demand change I still come to you'll see that the uncertainty oversupply is the biggest problem.
Right Okay.
Jeremy.
Our next question comes from Joe Moore with Morgan Stanley .
Great. Thank you to the extent that you guys talked about is incomplete kit type issues.
Where they may have excess inventory of your product.
What markets do you see that as being more likely than others. As it is it's been all of the markets.
And is there any anything you could do to help us kind of quantify what that impact might be.
Well, we start seeing it we see pockets of inventory and it sounds as the automotive songs security is really depends on how customer the customer purchasing a criteria right. Some customer continue to buy our chip until they realized that they cannot get all the components. Some people stop earlier, so they don't view.
Inventory of old ships, so we see small pockets here and there or cross sell across all the markets.
Okay and any sense for.
The magnitude of it.
Is this extreme by historic circumstances do you think.
I I don't think it's huge.
Huge amount yet otherwise we should make along.
The available visible to our investors, but we want to talk about what we're seeing in this and because what I start seeing people people pushing out the demands because of that but I don't think that's a severe problem just yet.
I appreciate that thank you.
Our next question comes from Kevin Cassidy with Rosenblatt Securities.
Thanks for taking my question, maybe just another way to ask Joe's question.
And the security camera business that was down 10% quarter over quarter was was that mostly professional or was it.
So home security camera.
I think it's both I think both the wind down and but also you have to remember seasonality is play a major role in there. If you look at our last five year trend, both professional and consumer market went down so it's not a surprise to us.
Okay.
And on the.
Maybe with the shortage of supply are you.
Or are you getting any manufacturing cost increases.
We have been in the last 18 months, we continue to look at it increase yes, and we continue to see that.
Okay can you pass along that cost increase tier to your customers.
So the extent, yes in the past we did pass some of the cost increase to solve the people when they tried to expedite delivery, but this time with a 14 nanometer problem. We did because of the cause rates to a point that we have to reflect to our customers.
Okay, great. Thank you.
Our next question comes from tourists Thunberg with Stifel.
Yes. Thank you just a clarification question on the foundry situation. So is it purely just capacity or are there. Some other technical yield issues because it sounds like you've had some issues for the last 12 months is just purely capacity.
I think that right now.
The what we've seen is that we say well don't get enough allocation, but what's the real reason behind it I don't want to speculate because Samsung and tell us, but I think it's become clear in early January that.
They either got overbooked or they have other issues that we're not familiar with but they have to reduce the allocation to us in Q2.
That's very helpful and could you just elaborate a little bit more on the timing for CV five in CV. Three so I think you mentioned revenue contribution CV five late this year.
Are you expecting to see these three revenue maybe second half of next year still.
<unk> three <unk> first of all yes, you are right C. D. Five we're expecting second half revenue from customers and in fact, both on the security camera as well as some of the consumer.
The traditional consumer product are full of CV. Three we are sampling to our customer I would say second quarter of this year and the revenue will come much later than that right. This is a really automotive.
Customer we're talking about.
Got it thank you for me.
Our next question comes from Quinn Bolton with Needham.
Hey, guys wanted to just ask on the video processor side do you think that that demand is perishable, meaning that if you're not sure. If you don't get the allocation from Samsung in the second fiscal quarter that that demand goes elsewhere or do you think that it's simply pushes into fiscal Q3 year fiscal Q4.
You know quit my my gut feeling is this if this is a one quarter problem I think our customer probably can can wait in their customer can wait for this drag a little further I think of some of the.
It will be comparable so he's really depends on how fast that we can work with central to control. Our this problem and it provides much better visibility to our customer for Q3 and Q4.
Got it and then how you can download it down to 2% of sales do you think that they recover over the next couple of quarters or do you think that they just continue to represent a very low single digit percentage of revenue going forward and effectively become immaterial at this point yeah.
Yeah, I think they will stay the stay that level, but you had last year. If you look at the whole year. There are still probably 6% of total revenue and this year there will be a low single digit and probably will stay there until become non material.
Understood. Okay. Thank you.
Our next question comes from Vivek Arya with Bank of America.
Thank you for taking my questions. The first one I actually have is on your balance sheet. When I look at the cash level, it's strong, but it's kind of at the lowest level since fiscal 15 and I am curious for me will you need to raise more whether it's to execute on the R&D roadmap or more importantly will you need to provide long term supply.
Agreements with your foundry suppliers.
Suppliers, because we are seeing many of the computing peers kind of prepay for capacity is that something that you.
You will also need to consider so youre short of supply going forward.
Right. So there are two separate questions. So first question is you know because of the acquisition of alkylate, our cash flow dropped to $150 million, but I think he also notice that in this quarter.
We generated 20 million cash flow so from the point of view, if we don't need the extra cash in the near future. We don't need to really raise upgrades any funding, but you made a great point to that there are many companies out there trying to using the company's cash to secure their foundry that's something we can't we.
We are considering to do but however that if we wanted to do is really we can get our lives we talked about this last time.
Can easily get aligned to our to help us to to a breach of that demand. So I think you know worst case is we're going to mine, but we are not considering any secondary at this point.
Got it very helpful and for my follow up just a quick one on on Q2, the 5 million impact does it kind of main conceptually Q2 sales closer to 85 ish million or are there kind of a positive offset from the CV side, then and are there any gross margin.
Implications because you know you had very strong margins in Q4, but you're kind of getting back to trend line in Q1.
What happens when you have this additional supply issue how should we think about just the puts and takes around the sales and gross margin that the best insight do you have today would be very helpful.
Right I I think what we said fine media is really directly impact our top line. So it was really just revenue probably equal.
We lose $5 million revenue in.
In Q2, so that's probably as a first question from a gross margin point of view there is a combination over cost increase as well as we talk about we have to raise the price to certain of 14 nanometer customers and that combination we need to we are factoring in our guidance. So that's why you see it.
Guidance on the gross margin line, so I think.
We continue to believe that long term our gross margin is at 59 to 62, but in the next quarter is based on the 63% to 64% guidance right now.
Okay. Thank you.
Our next question comes from David Kelley with Jefferies.
Hey, good afternoon, guys, maybe just a question on customer and product mix clearly has been a tailwind are you thinking about the sustainability of that benefit into 'twenty three.
Well I think that Oh from computer vision point of view I think all the indication that we had is really.
Make us to believe that we have very strong support on the not only customer base, but also revenue growth we've talked about for <unk>.
<unk>, 5% total revenue last year to 45% of revenue. This year and also we talked about the customer that we engaged in a number of customer that we're taking into full production. So we continue to believe that story is very strong right. So now I think there's a 40 nanometer product line shortage definitely will impact the <unk>.
On the.
Video processor.
Paula line and also put a impact on the revenue, but also some design win activities people probably want to look at you know in Q3 and Q4, if we cannot be veeva, how holiday cannot satisfy their revenues. So I think that definitely impacted that we need to evaluate quickly and work with central to solve the problem.
Okay. That's helpful. Thank you and then maybe one more following up on the earlier automotive deferral conversation I was I was hoping to talk if you could talk a bit more about the timing of what you're seeing there.
Did your customers start to pull back in January at some of the production disruptions. We're picking up again or is this something that you were seeing earlier in Q4 as well.
Yeah, just to be clear Hey, David This is Louis.
We didn't talk about in automotive deferral in fact, our automotive revenue increased 30% sequentially in Q4.
As we had a number of new programs kick in and in multiple geographies for both video processors as well as computer vision and so in Q1, we do see our automotive business down a little bit sequentially, but we do expect auto to be a key driver of growth in the next year.
Okay. Thanks, Louis one more if I if I may just to follow up on that the Q1 is is that more of a seasonal pullback or or is there anything from a customer standpoint, where there.
Pushing out order order books with some of the OEM production disruptions.
No I think it really comes down to some several new programs that kicked in again for both video processors and computer vision and now that they've established their initial inventory now their order rate comes back to a normalized run rate. So those are the dynamics, we think caused it.
Okay got it thanks for the clarification.
Our next question comes from Tristan <unk> with Baird.
Hi, good afternoon, any way you could help us quantify whether your contribution from the CV type of ramp in the second half and then embedded in that question.
Given the commentary that inventories.
Inventories are not a huge problem yet.
And it gets worse.
Any attempt to gauge and a window infection point corner he is going to be this year.
So for CV five.
We're comfortable with the ramp occurring in the second half of the year, there's multiple customers multiple product areas, where that's going to occur.
So there's no change there and no change with CD, three and that we expect it to sample in the first half of the year.
I didn't understand your question about inventory could you just.
Three phase out of repeat it.
Yeah, I think for me during the Q&A mentioned that inventories were not a huge problem yet.
And then two or three questions. So it suggests that it might get worse in terms of.
Inventory collections I'm, just trying to look at a.
The timing of where we should expect an infection point.
Well.
That's a question that we are trying to find the answer for because right. Now there are all kinds of supply chain issues that although our control a lot of our customer pushing out there oh silicon because they don't they cannot find although silicon like a microcontroller Wi Fi chip or panic.
So until they get a better visibility, we will knock it et cetera.
Yeah. So I think that is really reflected this industrial problem that we.
Until the shortage of all the components are getting better.
Going to have a we are going to have a very limited visibility on how much people are inventory.
Our inventory sitting on the supply chain.
Yeah.
Great. Thank you very much.
Our next question comes from David O'connor with BNP Paribas.
Great. Thanks for taking my question, maybe one or two on my side.
Maybe you foresee a question for John on the how we should think about the opex groups for for this fiscal year ahead, and should we kind of take Russia did trend was last year. That's my first question and just secondly, just a clarification on the on the seasonality for Q2, typically up but given the sympson issue and also the deferred shipments.
Can you give us any more on kind of the puts and takes here of how we should kind of model that for looking out towards Q2.
<unk>.
Yeah, so as far as Q2 goes I think really the only the only guidance that we're giving at this point is just the $5 million issue and so beyond that.
That.
On revenue in Q2.
We don't really want to make any additional comments at this time, just because we were looking to get more visibility as we get closer to that.
I think with regard to Opex.
As I think we said in the prepared remarks that we our expectation our plan is to continue to invest in.
No premium R&D that we've been developing in house year after year, and so that's going to that's going to.
Take on several different initiatives.
Helping modules for the <unk>.
Complete automotive stack higher up the stack.
That's one of the initiatives that we have developing.
Chips that fully take advantage of the ocular radar.
We recently acquired.
Their technology I'm, continuing to hire and so I think while we are in an inflection point for the CV revenue and we expect that to be very favorable for us on a long term basis I think in the near term we are expecting to continue to invest.
And I think the level of investment that we've seen in fiscal 'twenty. Two is indicative of what we might expect going forward.
That's helpful. Thank you.
Okay.
Our next question comes from Martin Yang with Oppenheimer.
Hi, good afternoon, and thank you for taking my question. My one question is on your.
Business development activities in China. It seems that there are a lot more non automotive known IP.
IP security camera projects going on.
Has there anything changed as a result of lower revenue exposure to your customers in China are.
Basically reflective of.
Normal designing activities among the Chinese customers.
Well in this.
In our script. This time, we can't talk about any Chinese security camera customer we didn't mention several Chinese automotive customer there is a video conferencing customer.
And one of the interesting automotive application is this.
Automatic being control or full of lighting.
So you know I don't think there's any major change on the Chinese security camera market per se I think that market today is hydrogen all dominated and we like we talk about all supply situations for them and I don't think that we talk about any major changes on the Chinese Kitty cameras.
Yes.
Well, maybe if I may clarify my question, a little bit I was asking if your overall business development.
Frankly, I'm not sure of resources have changed so I'd say, if you are you putting more resources into known security customer.
Customers or applications.
Yes, that's obvious because you know we realize that a security camera in China is a very sensitive industry and most of our Chinese customer looking for lung among.
Among U S suppliers. So however, all of the business, which is not that sensitive.
Sensitive.
Security camera like automotive like all the industry, we talk about we continue to put effort in China, because that's still a big market that we need to we can continue to get market share from so that's why you are absolutely right. We continue to have a strong team in Shanghai and the citizen, helping our stupidity alone in China.
And finally, we also see Ottrelite radar.
The China can be a very very good market for them too.
Got it thank you.
Our next question comes from Brian Ruttenberg with Imperial capital.
Yes, thank you very much.
I dig down a tiny bit on the security.
Business can you tell me what percentage of your revenue was security and the fourth quarter.
Hey, Brian this is Louis.
In the fourth book.
Tier security are in the fourth quarter was let me just check this.
Around 60% and for the year.
Security overall grew a little more than 50%.
It was around 65%.
Okay. So at 65% on this fiscal year that just ended.
Can you talk then about where you see it at least in the first quarter or for fiscal 'twenty three it would be great, but at least the first quarter, where do you see that percentage going I assume down from 60% to 55, how much of a stair step or are we talking about in terms of the security revenues.
Yes, so we see that Iot category, where security is the largest part of it growing sequential sequentially in Q1, but as you know with automotive growing to be 65%, 70% of our Sam over the next excuse me five years to six years over time, our revenue mix should shift in that direction.
Action.
Okay do you have a percentage that you're targeting for first quarter that is gonna be Iot slash security.
No we don't have a figure for that other than it will grow sequentially, that's our expectation and auto we expect to have a slight decline in Q1, given the factors we've talked about earlier.
And then just finally on that same point is this more of a demand issue or a supply issue on the slowing on the security side.
Hum.
I think as the seasonality right. If you look at the seasonality in the last five years for professional and consumer security camera is always that possibility.
Consistent with seasonality always play a rope. It finally Q4, two tier one yes, I mean theres also been a factor in the last two to three years.
Were hiking dowell, we are more than 25% of our revenue and you heard now they're in the very low single digit range combined so that's been a factor over this period of time.
Great. Thank you very much.
That concludes today's question and answer session I'd like to turn the call back to Dr. Wang for closing remarks.
Thank you and thanks to all of you to join US during the meeting today I'm looking forward to seeing you at some other opportunities in the near future. Thank you Goodbye.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yeah.
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