Ambarella, Inc.

Good day and thank you for standing by. Welcome to the Ambarella's third quarter fiscal year earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. And we ask that you ask one question and one follow-up question. To ask a question during today's session, please press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would like to turn the conference over to your speaker, Lewis Gerhardy. Please go ahead, sir.

Thank you, Lisa. Good afternoon, and thank you for joining our third quarter fiscal year 2023 financial results conference call. On the call with me today is Dr. Fermi Wong, President and CEO, and Brian White, CFO. The primary purpose of today's call is to provide you with information regarding the results for our third quarter of fiscal year 2023. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainty materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We're under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results are more fully described in the documents we filed with SEC, including the annual report on Form 10-K, that we filed on April 1st, 2022, for fiscal year 2022, ending January 31st, 2022, and the Form 10-Q filed on September 8th, 2022, for the second quarter of our fiscal year 2023. Access to our third quarter fiscal 2023 results press release transcripts Historical results, SEC filings, and a replay of today's call can be found on the investor relations page of our website. Fermi will now provide a business update for the quarter. Brian will review the financial results and outlook, and then we'll be available for your questions. Fermi?

Thank you, Lloyd. And Grabson, thank you for joining our call today. Q3 was mostly as expected. While there are material headwinds from an industry-wide semiconductor cyclical downturn, there is no change in our very favorable cyclical growth outlook for the opportunity enabled by our HAI endpoint investments. During Q3, in four key ways, we demonstrated significant progress to develop these opportunities. First of all, our positive market development momentum continues. highlighted by the November 18th announcement from Continental AG that after a multi-year evaluation, they became the first to integrate our CV3 SOCs into their ADAS product lineup. Second, our six-year automotive revenue is $2.3 billion and increased about 28% from the $1.8 billion announced a year ago, with approximately $800 million one business. This funnel is predominantly driven by our computer vision and the domain controller SOCs, and it is important to note our automotive send over the same period is still ten times the size of this new automotive funnel. So there's plenty of headroom for share gain. Third, our content in our customer's product continues to rise as we leverage our historical success with optimized processing for high-bandwidth sensing. This is demonstrated by a total blended HOC ASP we estimate will increase about 20% this year. Furthermore, we expect our new HOC like CV5 and the CV3 to commence significantly higher ASPs. Fourth, we are on track to reach our goal for CV to be 45% of our total revenue this year. and with a strong Q4 CV run rate, CV revenue is expected to post strong growth in fiscal 2024 and become a larger portion of mix. Now, I will provide some examples of our market development activity. On November 18th, German Automotive Tier 1 Continental announced that it will offer advanced driver assistance systems based on our CV3 AI domain controller SOC family. Our high-performance, power-efficient, and scalable SOC portfolio built for ADAS and the Thomas location complements Continental's solution for assisted driving and further advanced vehicle automation. The joint solution with its centralized single-chip architecture enables the next generation of vehicles to more quickly perceive environmental conditions by processing multiple sensor input simultaneously. Supported sensing modalities include high resolution cameras, radars, and LIDARs, as well as ultrasonic sensors. Our integrated SOC enables the early fusion of the real sensor inputs wherein the data from different sensor is combined for offensive vehicle automation. The high scalability of our CV3 SOC family allow vehicle manufacturers to choose the optimal performance level for their system requirements while using the same vehicle architecture. Additionally, this joint solution's low power consumption reduce cooling requirements, making sustainable energy saving possible while also reducing system costs. Continental's ADAT solution with integrated Embraer SOC will be showcased for the first time at the CES 2023 in Las Vegas. Also during the quarter, we announced another win in Japan with Toyota, who began shipping its Yaris and the Yaris Cross models, featuring a GenPax auto-thinning mirror with integrated digital video recorder. Based on Umbrella's age of automotive SOC, the dual-channel video recorder features both front and rear-facing cameras, as well as an app that allows customer to pull recorded video directly to their phones. Mercedes-Benz began shipment of vehicle in China and Korea with a car recorder from Korean tier one supplier, Mobile Appliance. Based on Umbrella's H22, the car recorder includes both an Ultra HD front camera and a QHD rear camera. In November, we announced that China-based InnoTag is in mass production with a driver and an occupant monitoring system that is delivered to GAC for inclusion in its AMCO SUVs. This system uses a single CV25 AQ-AI SOC and integrates one 2-megapixel driver monitoring camera and three 2-megapixel occupancy monitoring cameras. I'm also pleased to announce that our CV25 automotive AI SOC has been chosen for driver monitoring application as a major career automotive OEM, with production expected to begin in 2023. The CV25 was chosen for its highly efficient neural network processing, combined with very low power consumption. I will now talk about some of our customer developments in the IoT space, starting with the enterprise security camera market. During the quarter, Wakata announced its first multi-sensor camera, the CH-52E, which uses a full umbrella of CV25S AI vision SoCs. The camera includes a full independent 5 megapixel sensors to offer customers to wide coverage benefits of a fisheye camera, along with the high resolution, high image clarity of the full camera. Autola solutions have made a number of acquisitions of video security companies over the last two years, with many using Android SoCs. At the GSX security show in September, Motorola announced its new AVA Flex camera based on Android's CVFlow AI SoCs. The AVA Flex includes a Wi-Fi connectivity and a cloud-based video management for ease of deployment, while supporting AI features such as occupancy accounting and anomaly detection. Also, at the GSX show, Korean security leader Hanwha Taek-Win introduced multiple cameras based on Andorra's CV-2 AI vision SOCs, including new P-series stone cameras with a few 6-megapixel imagers and AI features, and a new T-series camera, including manual proof and bispectron AI thermal models. Other Korean Korea-based customers introduced new models during the quarter, including IDIS introduced new camera for license plate recognition based on our CV28 entry-level AI SOC, and the digital WADOC introducing 5-megapixel and 4K film models based on our CV22 AI SOCs. And in September, Xiaomi introduced launched its latest battery-powered smart door lock featuring 3D structuralized facial recognition. The smart lock unlocks using 3D biometric facial recognition in less than a second with Endura's CV20AM AI processor, performing both the face recognition and the 3D structuralized processing. The facial smart lock is also BCTC certified, which meets all of the security requirements for financial transactions in China. In the consumer camera category, Insta360 introduced its H3 360-degree camera based on Umbrella's H22 SoC. The camera includes a 5.7K active HDR video, 72-megapixel photos, and AI-based editing. We are also seeing opportunities in next-generation AI-featured video conferencing applications, both for home and commercial use. In China, H3C introduced its Magic Hub conferencing system that features an 8K camera and 8K large screen display. The camera is based on our CV52 AI SoC and supports ultra-wide-angle video capture and advanced AI features. In the streaming camera market, Delgado, a unit of Corsair, introduced its FaceCam Pro based on our H2 video processor. The FaceCam Pro features 4K P60 video and advanced features such as Pentel Zoom, making it ideal for gaming applications as well as solo and group video conferencing. And Verily is also in the process of strengthening its ecosystem of design and development partners to address new markets. and expand our customer base. In November, we announced a comprehensive relationship with E-Info Chips, an aerial electronics company, to extend design and development services for the next generation of CV4-based AI cameras. This leverages E-Info Chips' extensive engineering expertise and resources to support the rapid growth of AI IoT applications. including those in robotics, access control, media conferencing, and the healthcare market. This representative engagement, a majority of which are based on our higher value CV SOCs, provide insight into the early and the continuous success of our strategy. In Q4 alone, we expect to ship close to 2 million units of CV to family SOCs, and the outlook for the CV2 family remain very positive. Now with the CV3 and CV5, we are establishing new CV product cycles, building upon our proven CV2 family and further extending the functionality and the value or ASP we can earn. Continental was early and the first to validate this new CV trend from Umbrella. And in the next several quarters, we anticipate sharing more about our customer progress. Series 3 in a single SOC synergistically ties all the functionality Embraer has established over the years. Cameras and radar perception, deep learning AI, and the surface stack IP. It began 18 years ago when we established our camera perception processing reputation. and we are now addressing higher value HAF opportunities serving megatrends such as security, safety, and automation. This machine sensing opportunity are incremental and much larger than the human viewings market. So, we see a very favorable secular opportunity in place. We have the right strategy to address it, and we are continuing to demonstrate early signs of success. We intend to continue to invest a majority of our R&D to fully realize this market opportunity, leveraging our leadership position in the AI endpoint market. With that, Brian will now provide our prepared financial comments. Thanks, Jeremy.

I'll review the financial highlights for our fiscal third quarter and provide a financial outlook for our fourth quarter ending on January 31st, 2023. I'll be discussing non-GAAP results and ask to refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense and acquisition-related costs adjusted for the impact of taxes. Revenue for fiscal Q3 was $83.1 million, in line with the midpoint of our prior guidance range, up 3% from the prior quarter and down 10% year-over-year. Both IoT and auto product revenue increased sequentially. Kitting issue constraints improved. However, customer inventory reduction actions resulted in sub-seasonal revenue results as we had expected. Non-GAAP gross margin for fiscal Q3 was 63.5%, in line with our prior guidance range of 63 to 64%. Non-GAAP operating expense for the third quarter was $43.5 million, a decrease of 1% from the prior quarter and below our prior guidance range of $44 to $46 million. The lower than forecasted OPEX was aided by favorable FX impacts on our foreign spending. Q3 net interest and other income was $1.4 million, comprised of approximately $800,000 of interest income plus $600,000 of other income. Our non-GAAP tax provision was $1.2 million, or 11.4% of pre-tax income. This was higher than our original forecast and typical range, primarily due to taxable FX gains in foreign jurisdictions. We reported non-GAAP net income of $9.5 million, or $0.24 per diluted share. Now I'll turn to our balance sheet and cash flow. Fiscal Q3 cash and marketable securities increased $1 million to $199 million. DSO increased from 43 to 54 days, driven by the timing of revenue shipments, and days of inventory decreased from 125 to 124 days. Cash from operations was $6 million, and capital expenditures for tangible and intangible assets were $5 million. Free cash flow defined as cash from operations less capex was $1 million, and free cash flow on a trailing four-quarter basis was 12.5%. We had two logistics and ODM companies represent 10% or more of our revenue in Q3. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 62% of revenue. Shikoni and ODM who manufactures for multiple IoT customers with 11% of revenue. I'll now discuss the outlook for the fourth quarter fiscal year 2023. Q4 is typically seasonally slow, down to a high single-digit sequentially. But this year, the alleviation of some supply constraints is releasing tentative demand, which we expect to enable our revenue to remain approximately flat sequentially in the range of 81 to 85 million. Looking into next fiscal year, industry-wide component availability is anticipated to improve further. And as our lead times to customers continue to contract toward normal levels, we expect customers to continue reducing the amount of inventory they're willing to carry. Macroeconomic concerns are also rising at our customers. Considering the cyclical macro inputs We anticipate our fiscal 2024 Q1 revenue to be down more than our normal seasonality would suggest. Back to our fiscal Q4 outlook, we expect non-GAAP gross margin to be between 63% and 64% flat to the prior quarter. We expect non-GAAP OpEx in the fourth quarter to be in the range of 46 to 49 million, with an increase compared to Q3 driven by the continued build-out of new advanced CV3 SOCs and CES marketing activities. We estimate net interest and other income to be approximately $700,000, our non-GAAP tax rate to be in the range of 5% to 10%, and our diluted share count to be approximately 39.5 million shares. Ambarella will be participating in ARTE's Future Series Technology Conference on December 5th, NASDAQ's London Investor Conference on December 6th, Imperial Capital's Security Investor Conference on December 15th, and Needham's Growth Conference on January 10th. Southside analysts are also offering small group tours of our CES demos between January 4th and January 7th in Las Vegas. Please contact us for more details. Thank you for joining our call today. And with that, I'll turn the call over to the operator for Q&A.

Thank you. As a reminder, if you would like to ask a question, please press star 1-1 on your telephone. As well, one question and one follow-up. One moment while we compile the Q&A roster. The first question that we have today is from Matt Ramsey of Coency. Go ahead. Your line is open.

Yes. Good afternoon. Thank you guys very much for taking my questions. First of all, confirming for yourself and the whole team, congratulations on the continental deal. I wanted to ask you a few details about how that came together. It seems like even in your pre-Silicon simulation results and all of those things that they had been evaluating the CV3 platform for a while. And no doubt that they were one of the early sampled customers of CV3. So maybe you could walk us through how you went from simulated performance and power and capability metrics for CV3 onto sampled product onto the performance press release that they had and sort of the scope of the wins that you might have with Continental. And then I guess on the detail side, you updated your automotive funnel up 28% and from 600 to 800 million on one business. How is the Continental deal and potential customer wins from that relationship contemplated in the changes to your automotive funnel? Thanks.

Right. First of all, thank you. I think that's definitely helpful. I think the county, we have been working with county for a long time, even before when we take out and also produce our first generation CV2, we start talking to county. As you can see, this is a long process because really our claim of our CV2 performance and the power efficiency, it's hard to digest if you don't see a real silicon. And with CV2, we proved to them the efficiency of architecture, and we can deliver what we promised. But as you know, CV2 is good for ADAT, for the level two car, but for the level two plus, the level three, obviously they need a more powerful chip like CV3. And we start talking to them about CV3, I would say two years ago, with just a PowerPoint and our simulation. And, of course, because with CV2 silicon, we can really justify how we achieve the performance and power efficiency with our CV3 silicon and plus our simulation. the deal is really closed when we sample our CV3 chip and the development platform to them and then verify our claims on the performance and power efficiency. And I think that's a time that we really have a major breakthrough with the county, and they are totally convinced our claim and decide to move forward with this relationship. And I think that's one reason. The other reason is that I think we are – one of the very few companies showing off on the – we have a solution from the very low end of, like, you know – the driver monitor system, to the e-neuros, to a level two front cameras, to level two plus, level three, level four. We have a silicon roadmap to cover the whole space that our customer want with a single sulfur base. I think that's another reason that really I think our customer like county appreciate and that help us to secure this deal. And also, like Louis said, you know, we are expecting continue to do more business development, and we hope we can continue to give you updates in the next quarter in terms of our CVC business development. In terms of potential design win, I think, you know, because the county price release didn't talk about it, I will leave them to answer this question. But I have to believe that because counties is such a reputable and large customer and they have credibility in front of OEM customer, that will definitely, between county and us, we should be able to get design win for OEMs. And you will gradually show up. in our sales funnel in the near future.

And thank you for all the detail for me. I really appreciate it. Just I guess a final clarification on my first question and sort of a follow-up for Brian. So just to clarify, you guys raised the automotive revenue six-year funnel from 1.8 to 2.3 and the one business from 600 million to 800 million. Is the Conti relationship contemplated in both of those numbers, one of those numbers? I'm just trying to – if you could be a bit precise on what you guys are assuming in the funnel from that relationship, and did it materially change when the deal was announced? And I guess my follow-up for Brian, you talked about maybe underperforming normal seasonality as you go into fiscal Q1. Do you – maybe the last couple of years have been very strange seasonally for the whole semiconductor space given shortages and all kinds of other things going on. If you could maybe give us a little bit of clarity about what you're assuming normal seasonality is for fiscal Q1. Thanks, guys.

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

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

Thanks, guys. Really appreciate it.

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

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

So, first of all, as you can see, for those kind of design wings, the design cycle is much shorter than ADAS because they are not really safety sensitive. So that for ADAS projects, we usually look at, you know, in China, more than two years development. Outside China, it's a four-year development. For this kind of internal design, usually you can think about 12 to 18 months cycle that you can get into production. So that's why you start seeing more of those design wins. And that's definitely an area that we want to be really having high market share, and that's what we are doing. But that doesn't mean we don't focus on ADAS. In fact, on the contrary, I believe that we are doing well with ADAS as well as Level 2+, and hopefully we can give you more design win activity in the future.

Okay, got it. Thank you. And maybe a quick follow-up to your point on kind of the timeline of adoption. And specific to Conti, you know, very early days, as you demonstrate with them, the customers. But any early thoughts on timeline to eventual revenue contribution with this partnership? Are you seeing OEM's push to accelerate development to integration into production timeline faster? in ADAS and Autonomous as well?

Well, first of all, you know, I will leave Kanji to answer the potential revenue that they can generate with this relationship. But like we said before, any CV3 design will take three, four years to get to a revenue, and I don't think the timeline has changed. Okay.

Got it. Thank you. I appreciate you taking my question.

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

Great, thank you.

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

Hey, Joe. Yeah, so the methodology behind the funnel and how we discount both one and, you know, pipeline and change from, you know, our prior practice. And with regards to the distribution of the revenue through the six years of the funnel, it's not linear, as you can imagine. It's, you know, exponential in shape where the six year is, you know, much higher than the first year. And the reason for that would be, you know, the time to revenue that Fermi was just describing in a prior question. but it's also very significantly driven by increased penetration rates of these new technologies. And then most importantly, it's actually the higher ASP of the products that we'll be selling in each of these six years. For example, CB3 contributes revenue in years five and six, like we expect. The ASP per chip is much higher than it would be for, say, a DMS, CMS wind chip. with a CB25 product. So those are the factors that cause it to be exponential in shape, not linear.

Great. Thank you. Thank you for your question. And one moment while we prepare for the next question. The next question that we have is coming from Kevin Wong. Please go ahead. Hello, your line is open.

Hi, can you hear me?

Yep. Yes, we can.

Hi, sorry. This is Jeremy Kwan calling on behalf of Tori from CFO. I guess maybe a question first on the ASPs. Can you give us any more color in terms of where they stand today? And I understand, you know, that once 3D3 starts contributing, that's going to go up even more significantly. But can you help us, just give us more details on where they are today and where you see that? I mean, you said it's going to grow 20% this year. Is that for this fiscal year or things?

Yes, I think the comments for this fiscal year, it was at the high single digit, and now I think it's above $10 ASP right now. And the major contribution comes from, you know, the increased sales of our computer vision chip. And, in fact, that's probably the biggest item to help us to continue to get higher ASP. Now with the CV5 really getting to a ramp up in production, and we start sampling CV3, I also expect that our ASP will continue to this uptrend.

Great. Thank you. And I guess a quick question on the OpEx. You know, I understand some of that is CES for next year or next, sorry, in January. I guess excluding CES, what kind of run rates should we think about as we look to fiscal 24? Thank you.

Sure. We're still bottoming out on our OPEX budget for next fiscal year. But I guess the way I would think about it at this point is consider the exit velocity of our guidance for fiscal Q4, which at the midpoint was about $47.5 million. Going into next fiscal year, we're going to have additional chips in development that would cause that number to increase. So you've got two things to consider. Number one, OpEx has been increasing throughout fiscal 23. And so even if OpEx remained flat at the Q4 forecast level, it would be up on a year over year basis. And then in addition to that, we'll have some additional spending requirements. That's about what I can give you at this point. In next quarter's call, I think we can provide some more insights.

Great. That's very helpful. Thank you.

Thank you for your question. One moment while we prepare for the next question. Next question I have is coming from Kevin Cassidy of Rosenbaum. Go ahead, please.

Yeah, thanks for taking my question. And congratulations on the continental wind. And, you know, on the continental wind, are there expectations for them to use the scalability of CB3? You know, will they have a low-end solution and a high-end, you know, maybe three different solutions?

Yes, first of all, thank you. And also, I believe your read is right. In fact, in their price release, they do talk about one of the reason they choose the CV3 family is because they can use a sensor for a structure to apply from low-end to a high-end product.

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

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

Okay, great. Well, congratulations again. Thank you.

Thank you for your question. One moment while we prepare for the next question. The next question that I have is coming from Tori Fuenberg of FIFO. Your line is open.

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

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

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

So, first of all, using CV3 in a robotic application is definitely a strategy that Ambrella is implementing. And like you said, we are a small company. We have limited resource. Therefore, we need to target and be focusing on strategy accounts In Oto, we have a few of obviously countries. The first one, there are a few more. But in a robotic space, definitely our strategy is to have a target customer who has already some products in the market, and as well as they really need performance like CV3 family chips, doesn't matter who is high-end, low-end. Because if you look at a lot of robots out there, they are, there are multiple processing silicon in that robot today and definitely they can use some kind of domain controller like cv3 to integrate those functions together and provide not only the better cost but also better system design as well as the power efficiency so i think that's definitely a market we will continue to work on notorious i'll just add it's a good question because

you know, mobile robotics applications are not part of our automotive funnel. So that is something that's separate and not reflected in that funnel we've communicated. Great.

Thank you for all the information. Appreciate it.

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

Hi, Fermi. Brian Lewis. I'll add my congratulations on the Continental win. Quick question perhaps for Fermi. I think you hinted at this in Tori's question there, but the software development that's involved to get CV3 into production, how much of that is the Continental and its customers versus Umbrella? I think it's almost, maybe almost all Continental. And if so, is there an incremental effort that needs to be happening for every customer that adopts CB3 thereafter, or is there any leverage from the first one?

Right. So, first of all, I think, you know, our role in this relationship is we are strategic tier two to our county, and we are providing support to them to one of the support we need to provide is putting their sulfur onto our CB3, which, you know, we have been talking about this strategy for many years, and we believe we are the one that really focuses on this business model versus our competitors. And I think this is, you know, It's really about setting up a group of people helping our customer porting software. And that is how we have factored that into our headcount planning as well as our engineering development. So I think that's not a concern for us. And, in fact, we expect that we need to continue to do this kind of service for all of the potential customers.

Okay. That helps for me. And then a question for Brian, perhaps. Brian, you guided the first quarter next year as well as this year. Are there lingering supply chain post-kidding constraint issues factored into your below-seasonal guidance for 1Q, or are those kind of behind us at that point, and is that purely a statement about softening demand?

So we think that those supply chain issues are, for the most part, behind us, and that's something that we don't anticipate to impact our Q1 revenue significantly. What we do see is continued shortening lead times, and desire on the part of customers to reduce inventory levels. So that's really the impact that we're contemplating as we think about Q9 at this point.

Okay. Thanks, Brian. Thanks, guys.

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

Great. Thanks for taking my question. One from my side on the CB penetration, a firm you mentioned that are reiterated 45% for this year. Just wondering, can you give us any update on what the exit run rates of this year would be so as to kind of baseline us for next year? Let us follow up.

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

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

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

Thank you.

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

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

Right. So I think that's a great question. We continue to see strong IoT design wins on all of the markets we're talking about. professional security and the consumer security and also others. I think, like I said before, some of it is driven by new application that we talked about today. For example, Xiaomi introduced a new lock, which is using 3D matrix to identify face. And also, we're talking about other applications like video conferencing, which is really new market enabled by our CV product line. So I think for IoT space, outside of China, we are doing quite well. But at the same time, I want to highlight again that with the new U.S. regulation, we have basically zero play in China in the IoT, particularly security MR space. I think that's something I want to highlight about. And we talk about will be zero revenue for us next year.

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

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

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

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

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

The approximate split would be about 75-25 IoT versus automotive. Cool.

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

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

Awesome. Thank you so much, and congrats.

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

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

This concludes this conference call. You all may hang up, and everyone have a great rest of your day.