Ambarella, Inc.

Thank you for standing by and welcome to umbrellas first quarter fiscal year 2024 earnings conference all at this time all participants are listen only mode after the speakers presentation, there will be a question and answer session to ask a question during the session you'll need to press star 11 on your telephone. If you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Luis Garajari, Vice President, Corporate Development. Please go ahead, sir.

Thank you, Jonathan. Good afternoon, and thank you for joining our first quarter fiscal year 2024 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 first quarter of fiscal year 2024. 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'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 file with SEC, including the annual report in Form 10-K, which we filed on March 31st, 2023 for fiscal year 2023, ending January 31st, 2023. Access to our first quarter fiscal 2024 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 first 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, Louis. And good afternoon. Thank you for joining our call today. Our Q1 results was slightly ahead of our expectations, despite the significant headwinds from the ongoing semiconductor industry, cyclical downturn. We are not allowing this difficult environment to distract us from further developing our AI business. Before I talk about the details of the quarter with all the cross currents in the market together, with all the exciting developments in the AI market. I thought this would be a good time to review our strategic vision. Simply put, our transformation into an AI company is well underway, with AI already representing 45% of our total revenue last year and an estimated 60% this year. Now with our CV3 platform, we are expanding into a new phase of AI market development. The AI market is at a very early stage it is also dynamic with many technologies and applications emerging. With all excitement about AI, the key to our continued success will be our focus and the degree to which we can leverage our unique core competencies. Even with our focus, our current serviceable available market, or SIEM, is sizable, exceeding $4 billion this year and approaching $10 billion in fiscal year 2028. So what are we focused on? Embraer is focused on deep learning AI processors and software, which are replacing the legacy and the less powerful traditional machine learning approaches. With the deep learning market, the AI processor market has been dominated by training processors using servers typically for the cloud, data center, or enterprise. Our focus is on AI inference, which is where AI models get deployed and are practically utilized by end users. As the AI market begins to mature, most third-party research firms forecast the size of inference AI to surpass training AI. We have already demonstrated how we can leverage our rich heritage in human perception, also known as video processors, into AI. Our CV2 family was our first move into AI, and it targets inference AI perception processing at the age where cameras are the principal sensing modality. We continue to expect the CV2 family to be approximately 60% total revenue in fiscal year 24 and to represent a material portion of our operating profit dollars. The CV2 SoC integrates our camera perception expertise with our proprietary second generation CV flow AI architecture. The incremental processing to enable AI costs causes our CV2 blended everything selling price, ASP, to be greater than two times a video processor. This contributed to an over 20% increase in our phone-wide ASP in fiscal year 23. This year, the CV2 family is expected to become the dominant driver of our revenue and remain a key driver for several years. The solid stream of operating profit from video processors and the CV2 family of HAI processors is now being reinvested into the significantly more powerful CV3 platform targeting mobility applications. The CV3 platform builds upon our CV2 family experiences and utilize our proprietary third generation AI inference processor. For the typical level two plus application, the CV3 SoC provides the perception processing for all the camera and the radar sensors, as well as the processing required in the fusion and the planning layers. The significant amount of incremental processing expected to facilitate a CV3 SOC ASP to be five to 20 times higher than a CV2 SOC. It is also very important to understand CV3 is a platform, as the SOC in a CV3 family can capture incremental value by running our own autonomous driving AD software stack IP and our radar perception SOFR IP. We end to bundle this SOFR IP with our CV3 SOCs in a platform approach, providing our customers with the flexibility to pick and choose exactly what they need. Regarding our autonomous mobility partnerships at Continental, I am pleased to share that we extended our partnership to level four system development and confirmed the first business award of our jointly developed stack as a complete level four fallback system. The system will be supplied to Continental for customers in the commercial vehicle industry. To be clear, the CV3 platform is a major leap forward in terms of our value proposition, and it brings a new list of target customers, automotive OEMs. We are still in the early stage of building out the CV3's SOC portfolio and developing the market. However, we are not doing this alone. with leading tier ones like Bosch and Continental porting their software to CV3, validating our superior efficiency, jointly marketing to auto OEMs, using their scale, and bring more credibility to our CV3 market development efforts. Additionally, for the AI server inference market, we have already evaluated running large language model, LLM, on CV3-AD-HI, which has been sampled for nine months, and we believe the LLM performance on this existing SOC to be as good as NVIDIA A100 with much lower power consumption and a superior total system cost. We are now establishing a software development effort as well as a business development program to engage with customers. Turning to new products and the customer engagement in this quarter, In March, at IC West Security Show, we announced our CV72S for mainstream enterprise and public class security cameras. CV72 utilizes the same third-generation CVFlow deep learning AI accelerator architecture utilized in the CV3 SOCs. This CV3 derivative SOC brings to the IoT market the highest AI performance per watt, the fusion of radar and camera data, and it includes support for the latest transformer neural networks. Furthermore, CV2S offers six times the AI performance of a CV2 family, enabling it to run Embraer's groundbreaking neural network-based image signal processing software for 4K color, night vision, and HDR with plenty of headroom for additional concurrent neural networks. CV72S is now sampling to leading IoT camera companies. In IoT, there were a number of new enterprise and the public security camera introduced, including Motora, who introduced the H6 SL camera line based on CV25, as well as the V700 body camera based on our H6LM SOC. And the Vokada introduced its TD52 video intercom featuring 5 megapixel camera based on our CV25. iPro, formerly Panasonic, and Japan's largest security camera supplier, introduced multiple new product family based on our CV2, CV22, and CV25, including dual and quad multi-image models. And the European market leader Axis, part of Canon, introduced 3905 rugged tone models designed for surveillance on board vehicles, such as buses based on our A6LM. Also in Europe, Dallmeyer introduced Domora E-series camera, which uses our CV22 AISOCs to enable imaging in total darkness utilizing adaptive IR illuminations. In the home monitoring market, Elan.com introduced its ADC780 battery-powered Doppel based on our S5LM. I will now talk about the progress in the automotive market. As mentioned earlier, our new CV72S SOC is an important CV3 derivative for the IoT market. However, it is expected to also be an important derivative product for the automotive market, and in April, at the Shanghai Auto Show, we announced and demonstrated CV72AQ. This SOC targets multiple automotive applications, including Level 2+, and all applications with up to six cameras and five radars running on the San Jose Sea. CV72-AQ demonstration at the show included an ADAS plus parking system with a five-camera configuration, including an 8-megapixel front camera and multiple 3-megapixel fisheye camera running ULO-V7 neural networks on each camera. We also demonstrated, versus a leading GPU solution, superior performance and lower power consumption of the CV72AQ running transformer networks. We received very positive feedback on CV72AQ from Tier 1s and OEM in China. Also, as the Shanghai Auto Show, a number of other Tier 1s demonstrated CV3-based assistance. This included Continental Hujishou of 10-camera live demo with multiple neural networks running on each video stream. And Hyperview demonstrated its GT Hypermax platform, featuring a sensor suite of 11 cameras, plus one LiDAR and three radars in a car, providing CT navigate on pilot advanced functions, and leveraging the latest transformer network. In March, China's GAC introduced its Electric Ion Y Younger L2 Plus ADAS SUV with an intelligent 1V1R driving assistance system based on our CV22AQ AI SOC. And in April, GV Zeker introduced its Zeker X electric SUV with a face recognition access control system based on CV28AX AI SOC. In summary, a majority of our new customer engagement in activity continue to be our AI products. AI is expected to be a majority of our revenue for the first time in fiscal year 2024, and AI should continue to grow as a proportion of our mix. To bring our AI strategy vision together, first with the CV2, and now again with the even more significant CV3 platform, we have leveraged our core competencies cumulative knowledge and unique approach to establish strong presence in the AI deep learning domain. Our investment yield differentiated products that are very efficient and on open platforms that are scalable and flexible. The CV2 family is already very profitable and we are well into the development phase with the CV3 platform. In summary, there is still a lot of work left to to our strategy, and that the ongoing semiconductor industry cynical downturn pressure our near-term financials. However, we are confident in a long-term secular growth opportunity for each inference AI. We do not intend to stray from our strategy vision, and we are continuing to invest in our differentiated AI strategy. I will now turn it over to Brian to discuss the Q1 results and the Q2 outlook in more detail. Thanks, Fermi.

I'll review the financial highlights for the first quarter fiscal year 2024. I'll also provide a financial outlook for our second quarter ending July 31st, 2023. I'll 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. For fiscal Q1, revenue was $62.1 million, in line with the midpoint of our prior guidance range, down 25% from the prior quarter and down 31% year-over-year. As expected, total automotive revenue was approximately flat sequentially, while IoT revenue was down sharply, driven by customer inventory reduction actions. Non-GAAP gross margin for fiscal Q1 was 63.1%, in line with the midpoint of our prior guidance range of 62 to 64%. Non-GAAP operating expense for the first quarter was $46.2 million, up $200,000 from the prior quarter, and below our prior guidance range of $47 to $49 million. The lower operating expense was driven by continued expense management and the timing of spending between quarters. We remain on track to our internal product development milestones. Q1 net interest and other income was $1.3 million. This was higher than our original forecast, driven by a higher cash balance and returns on cash invested. Our non-GAAP tax provision was $300,000, or minus 5.5% of pre-tax income. This was slightly lower than our original forecast, driven by the mix of pre-tax income across tax jurisdictions. We reported a non-GAAP net loss of $6 million, or a 15 cent loss per diluted share. Now I'll turn to our balance sheet and cash flow. Fiscal Q1 cash and marketable securities increased $20.5 million to $227.4 million. DSO improved significantly from 57 days to 43 days as the timing of shipments throughout the quarter normalized after being back-end loaded in the prior quarter. Ending inventory increased slightly, up 1.8%. However, days of inventory increased more significantly from 116 to 151 due to the sequential reduction in cost of goods sold on lower revenue. Cash from operations was strong at 22 million, driven by the decrease in accounts receivable, and capital expenditures for tangible and intangible assets were 2.3 million. Free cash flow, defined as cash from operations, less capex, was 31.7% of revenue for the quarter and 6.4% on a trailing 12-month basis. We had two logistics and ODM companies represent 10% or more of our revenue in Q1. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 49% of revenue. Shikoni and ODM, who manufactures for multiple IoT customers, with 16% of revenue. I'll now discuss the outlook for the second quarter of fiscal year 2024. Customer feedback on end demand remains generally healthy. However, at the same time, customers also continue to aggressively manage down their inventory levels. Considering these factors, we estimate that our fiscal Q2 revenue will be flat to Q1 and in the same range of 60 to 64 million that we guided for the prior quarter. By end market, we expect that both automotive and IoT revenue will be approximately flat sequentially as well. We expect non-GAAP gross margin to be in the range of 62.5% to 64.5%, up slightly from Q1. We expect non-GAAP OpEx in the second quarter to be in the range of 48 to 50 million, with the increase compared to Q1 driven by higher R&D tied to new product development activities. We estimate net interest income to be approximately $1 million, our non-GAAP tax expense to be approximately $700,000, and our diluted share count to be approximately 39.7 million shares. Ambarella will be participating in TD Cowen's Technology, Media, and Telecom Conference on May 31st and June 1st, Bank of America's Global Technology Conference on June 6th, and Rosenblatt's Age of AI Conference on June 7th. 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 questions. Thank you.

Certainly. Ladies and gentlemen, just as a reminder, if you have a question, please press star 1-1 on your telephone. One moment for our first question. And our first question comes from the line of Gary Mobley from Wells Fargo. Your question, please.

Hey, guys. Thanks for taking my question. I wanted to ask about inventory drawdown with customers. You mentioned that customer and demand appears to be healthy, but obviously you're under shipping and demand. Could you give us a sense of by how much and by how much or how close we are to inventories getting back down to a normal level? And then maybe you can comment as well specific to China-related demand.

Yeah, this is Fermi. I think like Brian said, we haven't seen a huge change from the customer side. For example, last quarter, We talk about a customer that has healthy growth based on our silicon, but our silicon's revenue from that is down 15%, 20% year over year. And that situation continues, and I think the customer continues to confirm that their growth, and we continue to forecast lower revenue this year. So I think from that point of view, I think the situation is very similar to last quarter, and we have not seen any indication that... this uh inventory correction will end so i think the what we are looking for is really that the um ramping up of a new orders consistently from different customers that will probably give us an indication uh that is recovered uh we haven't seen that yet okay my follow-up i want to ask about your win that you captured in conjunction with continental is that an automotive grade win

And maybe you can give us a sense of where automotive, other automotive grade wins, you know, may stand.

Right. So that's an automotive grade win. And like I said, it's a level four car and it's going to be auto grade chip. And it's going to be its first design win by the After we announced and working with Continental. In this design, we involved not only our CV3 SOC, but also our SOFR IP, the SOFR stack that Conti and us are co-developing. I think it's a combination of SOFR and the SOC win. We are working on other design wins. For example, we talk about, first of all, we'll continue to work with tier ones like Conti and Bosch. on any potential design wins. At the same time, we also mentioned that in China, I think we saw seeing that a lot of opportunity in level 2 plus cars, and especially at the Shanghai Auto Show, we introduced a CV72AQ. It makes us believe that we have plenty of opportunity there, and we are optimistic that we're going to close on design win this year there, and also the time to revenue is much faster with those potential design win in China.

Thanks, Fred. Thanks, Fred.

Thank you. One moment for our next question. And our next question comes from the line of Ross Seymour from Deutsche Bank. Your question, please.

Hi, guys. Thanks for having me ask a question. For me, you mentioned that you haven't seen any signs of the end of the inventory digestion that's going on and that growth would really resume when some of the new products kick in. Can you, I guess... Dive a little bit deeper into that and so the two-part question would be where do you believe the revenue level would be for your company versus this 60 to 64 million if you were shipping to true end demand and to the extent it's dependent upon new products kicking in, when do you believe that occurs?

Right. So first of all, I think that we are not waiting for a new product to kick in. We believe that the current inventory correction, when they finish, the existing product line will come back to life and it will go back to an original level. So we are not counting on new product design to fix this inventory correction problem. And for your first question in terms of level, last quarter when we looked at just one example of a customer, we think that we are probably like a 25%, 30% below the real estate level. So I think we still hope, believe that's the level, the differences we're looking at. And hopefully when the inventory correction finished and all the customer went back to normal, I think that should give you an indication where we think the normal level of revenue is.

Got it. And I guess for my follow-up on the automotive side specifically, it's good to see the design one with Conti turned into products, etc., That business has been basically flat sequentially, I think, for four quarters now. Three quarters are reported, and it looks like you're guiding it relatively flat. When's the timing where we should start to see that business picking up? You guys have talked about this investment. I know it's a longer-term strategy for the company, but it seems like one that should yield some pretty strong tailwinds off the size company you're currently running at. So just wondered on the timing that we should look for and what the drivers of that growth should be.

Well, I definitely think that the flat, if you look at, there are a few quarters before the inventory correction, and now you're comparing to the inventory correction period. So I think the last two quarters have definitely been impacted by inventory correction in the auto multi-section. So I also believe that as soon as inventory correction finishes, auto should show some revenue growth from that point of view. But like you said, the really big auto growth should come with the you know, the ADAS market and also level two plus market will not go into production.

Great.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Tristan Guerra from Baird. Your question, please.

Hi. Good afternoon. I just wanted to... have a follow-up on the inventory correction and also try to tie this with market share shift. So it's no secret that some Chinese companies have tried to diversify away from U.S. supply, either because there is a push for that from the Chinese government or because they're concerned about potential future sanctions. And I know you've very much de-risked your surveillance camera exposure to China in the past, but you still have exposure in automotive. So I wanted to know if there is any signs that perhaps the ramp in China is not expected at the pace that you thought would happen a year ago. Are you getting any feedback? And also, just to the extent that the inventory correction that you're describing seems to be a bit more pronounced than... some of the other companies where it's been, you know, really more smartphone and PC-centric for other companies. So any elaboration around that would be great.

Right. So in terms of the geopolitical situation, I think for auto multi-market, it's much less severe than security, right? Security is really being viewed as, you know, the... the safety of the country. So that's why I think people are trying to avoid U.S. components. But in automotive, in fact, if you look at the middle and high-end components in the Chinese market today, all of them are U.S. components. So I think that's because in automotive processing, I think that our solution among other U.S. components still have better performance efficiency, and we haven't seen a similar impact on Chinese government on mandating the Chinese automotive OEM use exclusively the Chinese component. So I think that's the two things add together. I think I still believe that we won't see a severe downturn on the Chinese automotive business.

Okay, great. And then as my follow-up questions, Obviously, you've made that software acquisition. You have the sensor fusion chip. So do you think you have all the pieces you need to move into L2 plus and L3 application? Are you getting any feedback about customers looking at your company size versus, say, larger supplier or is it purely based on chip performance where obviously you excel? Is there any other consideration in terms of getting design wins and how you would address that? And that question will also tie to the product roadmap and whether customers are kind of wondering where will you be five years out in terms of product roadmap.

Right. So I think the... From the product roadmap point of view, I think for level 2 plus, level 3 car, I think we have all the contents that we need to go after this market. Of course, from the hardware and software point of view, I think we can offer a complete solution. But from the strategy point of view, as we said before, we are not bundling hardware and software together. We are trying to offer a software platform that a customer can pick and choose, and we can help our customer to build their own software stack. And working with Conti is probably the best example. And in terms of scale, it's always a problem. When I try to compete with a bigger company, it's always a disadvantage for us. But I think that's the reason we continue to try to work with the bigger tier ones and with their scale and with their expertise that will help us partially to address this problem.

Great. And clearly the Conti and Bush design will speak to that effect. Thank you very much. Very useful.

Thank you. Thank you. One moment for our next question. And our next question comes from the line of Tori Sundberg from Stifel. Your question, please.

Yes, thank you. First question, Fermi, could you just talk a little bit about the main difference between the CB3AD and the CB3AQ, you know, whether it's functionality or ASPs or, you know, any other color you could share with us?

Right, so CV3-AD and CV72-AQ, first of all, they are all based on the same CV3 architecture, all of them using the third generation of AI-influenced AI processor. The main difference is the CV3-AD is designed for the auto-grade chip-level ASO, and CV72-AQ is designed for the system-level autograde. So I think that's the main difference. So I think, for example, CB72AQ definitely is target for Chinese market where people are willing to accept system-level ASO system versus chip-level ASO system. That's the main difference.

Very good. Thanks for clarifying that. And my follow-up question, you announced the design went for the software IP modules. Again, I was just hoping you could elaborate a little bit more on that. It's surprising to me when I hear SOFR IP module, because I think hardware and software. How exactly is the accounting for this particular design?

I think I see as we announced this is SOFR partner with Conti. Basically, the idea is that We are contributing a portion of sulfur solution, and we work with the county sulfur team to integrate those modules into a complete sulfur stack, leveraging strength of both sides. For example, Embraer's strength is on the perception side, particularly today. It's video perception, radar perception, but county definitely has a lot more system-level solutions and famous for their auto-grade system software. So I think that's where we see that we can leverage both sides of a strength and build a software stack based on leveraging the both-side strength. So I think that's an approach that was different than the customer. And also for OEMs, if there's anybody who wants to do a similar business model, we are open to that, too.

And on the sort of revenue accounting for, I mean, is this a module sale or IP revenue?

Oh, I see. That's a basically software revenue split. We need to decide how to share the software revenue together. Understood. All right. Thank you very much.

Thank you. One moment for our next question. And our next question comes from the line. of Kevin Cassidy from Rosenblatt Securities. Your question, please.

Yes, thanks for taking my question. You know, maybe a similar question to what Tristan had about automotive, but in the AI server, as you move to the adjacent market, AI server inference, and you said you have about the same performance as NVIDIA A100, but much less power. Can you say, like, do you have all the tools you need to move into this server market or into the cloud inference market? Right.

So obviously, you know, the similarity between our current automotive market and the new IA server market is they are really running a neural network on our chip. So from a tools point of view, that we only develop many, many software tools to help our customer to port a neural network onto our chip. But obviously, LLM is a different beast because they are much larger and than the typical neural network that we are working with. So definitely, there is an optimization cycle we need to work on. But the reason we decide and that we think we have a great opportunity here is, first of all, we have a working silicon demo. Two, we have a bunch of expertise and the software tools available that we build for other market. Three, we just need to fine tune and optimize the current software for this LLM to achieve the best possible performance that we can get. So I think from that point of view, the effort for us is limited. And also, I think that we also believe that in the market, very few people can claim what I just said, that we have a working silicon, can show real performance and real power consumption. and also demo to the customer. So I think that's our advantage and also believe that the extra resource we need to put on is something that we can handle.

Great. And what would be the go-to-market strategy? Are you looking for a few maybe flagship customers to lead the way or are you going broad with lots of different customers?

No, I think we have to be focused. I think we need to identify the sweet spot. I think we should talk about strategy later because we are in the process of talking to customers, but I think we need to focus on where our strength is and also focusing on companies that can leverage our chip and our software immediately. And so I think that one thing we learned is to work with customer who has really, they feel the most painful experience with current solution, well, most likely to work with us. And that's where we're going to focus on.

Okay, great. Very interesting.

Thank you. One moment for our next question. And our next question comes from the line of Quinn Bolton from Needham & Company. Your question, please.

Hey guys, thanks for taking my question. I guess for me and Brian, maybe, maybe just your, your best guess. I mean, we've been, you know, working down this inventory now for a few quarters. Certainly doesn't sound like it's, you know, you haven't seen any green shoots yet in terms of the orders. What's your best guess as to how many more quarters you think it will take to, to work down this inventory? Do you think we'll be pretty clear by the end of your fiscal year or the end of the calendar year? Do you think it could take longer?

Yeah, Quinn, this is Brian. A quarter ago we said that, you know, our guidance for fiscal Q1, which was $62 million at the midpoint, we thought that that would represent, you know, the bottom as it related to impacts associated with inventory adjustments and that it would likely not get worse from that point. And we're kind of sitting in the same place we were 90 days ago from the standpoint that we still believe that's the case. What becomes challenging is forecasting when this thing lifts off again and at what slope. We certainly have visibility to backlog, but that backlog has been shifting. We've had reschedules, cancellations that we've had to deal with. So while in normal times we can look at that backlog and have a lot of confidence as to how revenue might shape up, say, in fiscal Q3, because of the movements that we've seen, our confidence in providing a forecast would be lower in this cycle than, you know, kind of in normal times. So, we don't see it getting worse, but the visibility to the second half and just how that recovery plays out, I think it's hard for us to talk to at this point.

I understand you're not getting to the fiscal second half. Historically, you've seen some stronger seasonal trends in the second half. I mean, can you just provide any framework how we might be thinking about it if the inventory doesn't get any worse and you see normal seasonality, that would imply a lift. Obviously, if you start to see the inventory correction end, that would imply a lift. I mean, are you sort of suggesting, hey, keep it in the 60 to 64 range? you know, until you see the inventory clear, or do you think you can see some seasonal upticks, you know, in the second half?

Well, you know, normally we would see some uptick, you know, in the fiscal third quarter in particular. You know, and we would hope that we do again, but we're just at a point where We don't have the visibility and confidence to put a number out there and try to give you some magnitude of directional increase at this point in time.

Got it. Understood. Thank you, Brian. And then I guess for Fermi, I guess I was a little surprised to see your first win with Continental being a level four win. I think the initial partnership you'd announced, you know, back late last year, I think, was for level two plus. And so can you just sort of maybe talk about how the level four win came together? I know you had expanded the relationship with CES, and so maybe, you know, that was on the fast track. But when, you know, were you surprised that the level four came before level two plus with Continental?

Well, I think that the engagement definitely after we announced this sulfuric collaboration between Conti and us, which will happen at CES. And things go really fast after that. So I think definitely I'm not surprised how fast this developed. And also, I need to thank Conti for putting this whole thing together, because the one important thing is that to sell that joint software stack and to get the confidence with the customer is important for us, and I think that's a great win for us. But at the same time, I want to say again, on a level two plus, I think that When we look at two things, one is the momentum with the county and the Bosch that we're still working on and still there. But more importantly, I really think now with the Shanghai Auto Show and with our CV70 to AQ announcement and the sampling, the component and the software to a customer recently, that gives us confidence that we're going to see CV70 to AQ level 2 plus design win this year and maybe quick revenue returns. In China, you know that the design cycle is not four years. Usually, it's less than two years. So we are hopeful to see a really quick revenue return from the CB70 to AQ, and also that we have a roadmap continue to address this market. So I think overall, I think Level 2 Plus design win is we are continue to be our focus, and we think we'll continue to deliver what we think that we can do.

Perfect. Thank you, Fermi.

Thank you. One moment for our next question. And our next question comes from the line of Brian Ruttenberg from Imperial Capital. Your question, please.

Yes, thank you. Can you give me, first of all, housekeeping DNA in the period depreciation and amortization?

Depreciation and amortization, is that the question?

Yes, that's affirmative.

Yeah, for fiscal Q1, I believe it was $5.8 million.

Okay, $5.8 million for the first quarter. Also, in terms of DSOs, do you anticipate DSOs stabilizing here? So, in other words, trying to understand your cash situation probably will go down. You probably won't have a stair-step event again, or do you anticipate DSOs continuing to go down?

No. I mean, what we saw in fiscal Q1 was a normalization of the timing of shipments throughout the quarter versus, say, fiscal Q4, where shipments were very back-end loaded. So we had a couple of quarters. Fiscal Q3, Q4 were both very back-end loaded quarters. Q1 normalized. DSOs came down. that provided about a $22 million benefit to cash flow in the quarter. As we move forward, we would expect DSOs to remain at similar levels. Thus, we would not expect to get a large benefit in a future quarter from another stair step down, for example. So as we move into Q2, Obviously, at the revenue level and the other metrics that we gave you, that would be a forecast for a non-GAAP loss. And so you'll have lower free cash flow in fiscal Q2 versus Q1. And as we go through the year, cash flow is just going to be highly dependent upon the revenue levels. And we've talked about the fact that we don't have great visibility at this point in time to the second half revenue.

Great. Thank you very much.

Thank you. One moment for our next question. And our next question comes from the line of Suji Da Silva from Roth Capital. Your question, please.

Hi, Fermi. Hi, Brian. Good to see the continental wind. I don't know if I missed this, but did you say the L4 commercial vehicle customer, what geography that was?

We didn't. And we, you know, our customer doesn't want us to disclose that yet.

Fair enough. And then I think, Fermi, you talked about a range of ASPs 5 to 20 times. Can you just talk about what drives the delta there? Is that more compute horsepower on the chip, or is that compute plus software? Any color there would be helpful.

I think that comment is purely for silicon, does not include sulfur. So the difference is really from the low end to the high end. So, for example, the low end, for the high end chip, we talk about $400-plus, and a low-end, for example, our 655 chip that we're talking about is probably in the $100 range. It's really that level of the different performance price range that we're talking about. I also believe that for automotive roadmap, you need to have a family of chip to address different performance level. For level four, level three, level two-plus, even multiple layers, level two-plus require different chips. I think that's where we're talking about. Okay.

Thanks, Fermi.

Thank you. One moment for our next question. And our next question comes from the line of David O'Connor from BMP Paribas. Your question, please.

Great. Good afternoon. Thanks for taking my questions, guys. Maybe, Fermi, just going back to the question on the AI inference opportunity, Can you just give us a bit more detail there on what type of customers are potentially kind of you could engage with on the AI inference side? Is that data prize or enterprise or any particular vertical that you think may be open to you? And I know it's 30 days, but as you mentioned, you have a working chip and you need to rework the software. But what kind of timeframe do you think you could potentially get to revenue there? Is that kind of three to five years out? Is it before that? And anything around kind of content opportunity there would be helpful. Thank you.

Yeah, so it's a lot of questions. So I think, like I said, the target market is, is really where, you know, I think our first target is really on the edge server side where you can focus on, you know, the enterprise and the people who are running their own neural network. You know, for people running OpenAI or other very large model, that might not be the best customer at this point for us, but there are plenty other different software SVs and then that use driving different neural net model either for their own code or they are running at the enterprise level, those are the probably sweet spot for our chip because we know that, just like I said, the scale definitely matters in this market too. And we need to pick the best market to go after. And we're still in the process to figure that out, but I definitely think that's what I just said is our current thinking. But I think in terms of the content, I think, is obviously even better than our automotive ASPs because the competition out there is selling at a much higher level. And also, we have a great advantage on both on the power consumption side. We're not talking about 5%, 10%. We're talking about significant difference between power consumption as well as the total system cost. So I think from that point of view, it will help us to get a healthier content there. I think there's another question I forgot. Time to revenue. Oh, time to revenue. So, you know, I think we need to get a demo running, then a software tool running so the customer can port, and then we can talk about design, and then we talk about revenue. So I think if you ask me today, I would say that's a 24-month process, totally.

That's quite helpful to bring that. Thank you, Fermi. And maybe just to follow up on that for Brian, just on the ramping that software development team, just to clarify, that fits in with the current OpEx envelope, or would there need to be some kind of step up there to fund that new team? Thank you.

Yeah, our plan is to use our current expertise and team to – to facilitate this activity. The idea is simple because we have our internal team has, you know, helping many other customers to port their neural network onto CV3. And we understand LLM because it's so large and it takes extra effort so that the best way to do this is to fund it and put an internal resource on this project. it will take a tradeoff, right? We don't plan to add much of the resource into the company, so I think that we need to really focus on the area where we think is important. I think where it's important for us is definitely security camera to provide cash for us, maintaining our CV3 momentum with the current design wins like Bosch and Conti, and try to secure a CV3 design win with OEMs, and also try to find the resource to fund this LLM and everything else is a trade-off that we need to consider.

Very helpful. Thank you. Thank you. One moment for our next question. And our next question comes from the line of Vivek Arya from Bank of America. Your question, please.

Hi, this is Blake Freeman. I'm from Vivek. Thanks for taking my question. Just first, on the cash side, Just curious, I know you mentioned talking about R&D investments over the next few quarters. Just at your current cash level, are you comfortable there, or do you see any needs to raise incremental cash in the future?

No, we don't see any need to raise incremental cash. We have a strong cash balance, no debt, and we've got a history of being positive from a free cash flow perspective. So no need to raise additional cash.

Great. And then quickly as my follow-up, just given the current revenue levels, we've seen a relatively substantial change with kind of, you know, the split between IoT and auto is now roughly 65%, 35%. Gross margins have still kind of held up relatively okay and above this, you know, the long-term range of 59% to 62%. So I'm just kind of curious if you can give us the puts and takes onto the gross margin side and maybe beyond Q2 out of gross margin level.

Yeah, I think we'd stick with that long-term model that we provided previously. In recent history, we've been delivering higher gross margins than that, and we would expect that that would continue until we get into the impacts of potentially very large automotive opportunities, and that's why that long-term model provides for a slightly lower gross margin if we need to get there to secure those design wins, but For now, in the foreseeable future, we should be at recent gross margin levels and probably a little bit higher once we get through this inventory correction and get back to slightly higher gross margins that we were posting last fiscal year.

Thank you. Thank you. Take you one moment for our next question. And our next question. comes to the line of Martin Yang from Oppenheimer. Your question, please.

Hi, thank you for taking the question.

I'm sorry, I cannot hear you well.

Can you hear me better now? Yes, yes. Hey, Jonathan, let's go to the next question, and then we'll give Martin another chance after this question. Okay, understood.

One moment for our next question.

And our next question comes from the line of Matt Ramsey from TD Cowen. Your question, please.

Hi, this is Josh Pachalter on behalf of Matt. Thanks for squeezing me in. It was great to see the CV3 win with Continental for commercial applications. I was wondering if you could provide some initial feedback on how it's going on the consumer passenger vehicle side. I recognize it's only been a few months since the partnerships have been announced, but You're going against some entrenched and large competitors in the central ADAS domain. And I was wondering how Conti and Bosch are positioning your CV3-based solutions to win in that market. Thank you.

Yeah, I think, you know, first of all, you know, we have a strong relationship with both Bosch and Conti. And Conti has even further collaboration because of the SOFR relationship. And you can see that SOFR relationship already stopped paying off. not only on the level four, but also we start building an engineering collaboration on that. So I think that activity definitely is very helpful. And also on the business side, both sides, working with the county and Bosch definitely help us to address the scale problem partially. And also we continue to believe that working in county and Bosch is the right thing for us to do to get design wings in the U.S. and Europe. I think that says that I also believe that our first Level 2 Plus design will come from China, like I said, because the momentum we see after the Shanghai Auto Show is real and that we not only demo a powerful chip, but also we demo something that very few people can do, which is running transformer neural network in a low-end chip that just nobody out there can demo, like the company you mentioned. now then the low-end chip can demo transformer efficiently. And the transformer becomes such an important neural network, and it's being used as a benchmark everywhere. So particularly in China, where AI and neural network performance is very much appreciated. So I think that's a momentum where we definitely enjoy it, and I think, I hope that we can get several design wins in China this year.

I appreciate the call. That's actually a nice segue to my follow-up. Can you talk about, I think this is the first time you've mentioned auto being a source of inventory correction despite the results coming in in line with your expectations. Did that get any appreciably worse during the quarter? I know we've all heard about weakness in the China EV market. It'd be helpful if you could help us understand your exposure there and if that worsened and drove, I guess, some incremental weakness during the quarter. Thank you.

No, what we said before is we think our inventory control in auto is much less than the inventory control in IoT. That's what we said. We didn't say auto was not impacted. We definitely see several customers got impacted, but not as bad as IoT space. So from that point of view, I think we still think that I still expect that when the inventory correction is finished, the auto should go back to the growth. Got it. Thank you.

Thank you. And Mr. Yang, if you could press star 11 again, we'll open your line to see if you can be heard this time, if you have better signal. All right, one moment. Mr. Yang, your line is now open.

Hi, sorry about my technical issue. Can you hear me on that? Yeah. Yes. I have a question on TV72. So do you expect your automotive and IoT customers to most of them to opt and adopt the Oculi integration that comes with DB72?

That's a good question. So I think for the IoT, the adoption of a radar system will be slower because the whole market, the IoT market, is moving towards radar, but not as fast as auto. Radar in auto space is basically everywhere. Everybody realizes that they need to have a radar solution in any level 2 plus systems. So I think in terms of adoption, that the radar will go to auto space first. For CB72AQ, I think that the radar integration will come later, because right now we're focusing on winning the video site. However, at the the second phase of software development, also, radar integration will come also.

Got it. Thank you, Fermi.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Dr. Fermi Wang for any further remarks.

And thank you. Thank you very much for you to join us today. I'm looking forward to talk to you next quarter. Thank you.

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.