Ambarella Inc at Berenberg US CEO Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : All right. Well, thanks for that, Fermi. So maybe to start out, we got a lot to talk about with the Oculii acquisition and all the growth drivers that are kicking in. But maybe you can start off taking a step back and talking a little bit about Ambarella's uniqueness and that they are a platform technology. I think that's something that people don't quite understand. So could you explain what that means and what the benefit of that platform is to customers? And I'm talking specifically for your computer vision chips. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 09, 2021 / 1:00PM, AMBA.OQ - Ambarella Inc at Berenberg US CEO Conference (Virtual) Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Right. The platform that we talk about is really a technology we use to not only just showing up our technology but also how to support our customer. We call this an open platform, which is very important for most of our customers because most of the customers who come to us, they want to leverage what we are good at. But in addition to that, they need to add to their own differentiation technology into this joint product. And this open platform allow them to do that. Not only allow them to do that, we help our customers in the last 20 years, continue to help them to put their software onto our platform with our software in there. So this is an open platform, is powerful to enable customers to provide differentiated technology. That's one. The second thing is important is this platform is a scale, meaning that, for example, we offer the CV2 families a CVflow chips. You can see that we have roughly 7 different CV chips here, but they are all so very compatible within this platform. What that means? If our customers develop software on one platform, one chip, the same software can easily scaled, in fact, we allow -- just with the compilation, they can easily taking their software to a different chip. What that means is because different chip has different performance and price point, it really make our customers easy to adopt this whole family of chip, without reinvest all of the software development. The third thing is this platform is based on some really critical technology. We differentiate our technology based on video quality, we believe, we have the best video quality among our competitors. We have the best video compression. And more importantly, our computer vision technology has shown up and show people that we really know how to drive the performance per watt. And our power consumption continue to be the shining point for our platform. So those strong support here really helping us to differentiate us against our competitor. Now we add Oculii's radar technology into this platform that makes this even more powerful offering to our customers.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Okay. Helpful. And in automotive, you guys relatively recently talked about a $600 million funnel. So I think understanding where you guys -- where computer vision will play in automotive could be helpful if you could explain what are -- maybe talk about some of the design wins you most recently won and then kind of where you expect growth to come from? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Yes. So first of all, this page shows you all of the automotive applications that we are working on. And of course, our traditionally work on the recorders and data loggers, which are popular in the Asia side. But if you look at our computer vision chip, the most popular application is on the right-hand side, is really starting with ADAS, then moving to DMS, in cabin monitoring, and now move to an L2+ eventually go to L4, L5. If you look at our design win on the DMS, OMS side, we announced Dongfeng (inaudible) our customer using our solution today. And with fleet management, we announced multiple solutions already like the Hyundai's KeepTruckin, Momenta. There are quite a few that fleet management companies are using our solution today. In terms of the L2+. We announced Arrival, Motional, all of those guys as our key customers moving forward. But I think that this is really just the beginning of the trend because, for example, I really think that Level 2 or Level 2+ is going to be the mainstream revenue generation for us moving forward. And this is where we focus on. And we have L2 -- we have a multiple chip solution that can address this market. But again, Oculii's radar software directly helping us to secure more design wins in this category.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : So lower -- so yes, the lower cost and combined with computer vision makes it a as good enough technology to compete resolution wise. And I guess what -- can you size that opportunity? What you think -- I don't know if you have units in the mind or growth rates or however you guys were thinking about what this could -- like how big could this get? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Well, in fact, in this slide, you can see that we think that in calendar year '21, we have 90 million units of market and grow to 240 million units in calendar year '26. I think this is just by itself a very big market. Of course, there's from high end to low end, there's huge range just like a video. But I think that all of the key rationale behind us is that all of our applications that we are selling to will require radar or different type of a sensor modality to help the accuracy and the redundancy of the video systems.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : And another interesting angle, we talked about the opportunities in automotive with Oculii, but what are some other opportunities outside that? Maybe you guys mentioned industrial robotics and even security. What are those applications, that you're referencing? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Well, in fact, after we announced this deal and we went out to talk to all of our existing customers, automotive and the security camera. And we got overwhelmed response by a security camera company because they are all looking at radar. Maybe they look at radar starting with the high-end system, but that's because the cost and also the complexity. However, if we can -- I think when we integrate that software into our chip and try to minimize the bond, that will help the adoption on the security camera side. And for example, I knew that some of our key customers already have a high-end product with radar in there. And for example, even some of the consumer security camera already integrated radar in there. So I think this trend will continue. And I truly believe that the security camera can be a huge market that people ignore for the radar system moving forward. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 09, 2021 / 1:00PM, AMBA.OQ - Ambarella Inc at Berenberg US CEO Conference (Virtual) Of course, that all of the other robotic application we're talking in the past like AGV or other smart manufacturing, as long as you need to work with -- you need a redundancy or you need a more accuracy, a radar become very easy way moving forward. Because now in the future, we're going to integrate this to -- we're going to offer software solution for both the video and radar on top of our CVflow engine. That will make it easier to adopt and reduce the cost.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Okay. Okay. Well, maybe we'll come back to Oculii in a minute. I was trying to get through a few others that are more topical maybe right now. So obviously, the topic is towards supply chain challenges. However, you guys have been doing fairly well navigating that and a lot of that has to do with your kind of supplier relationships. Can you talk about, as of last couple of quarters, how you guys have managed to handle this so well? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Right. So in fact, that we have a strong relationship with our supplier like Samsung Foundry, the ASE testing and the packaging house. And we have a strong relationship there. And we -- from a foundry point of view, I think Samsung although is tight, but it's not really creating a severe problem for us. So in fact, in the last several quarters, although that -- the biggest problem for us was the Texas, Samsung's Texas foundry got shutdown because of weather. But after that problem is resolved, although we are very tight, but we don't -- we are not short to our customer. The biggest supply problem that we are facing right now is really that our customers cannot get enough parts from other vendors. For example, MCU, WiFi chip, power supply. Those components are continued to be in high demand and short supply. And while talking to our customer, everybody says they don't see anything, they don't see any improvement probably until early next year.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Right. Okay. Another question comes up often, just kind of form of the landscape of this computer vision industry. I think a lot of -- I think it was a misconception that it can be commoditized, and there's a lot of players around doing this. Can you talk more about competition, how you perceive? Whether it's start-up players or some industry giants like Qualcomm that have showed interest in this area. How do you guys fit in? And where -- I guess, relative to that, where are you unique? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Well, first of all, even video space, when we start the people kind of say, "Well, this is easy technology people can easily compete with you." But we haven't seen even very strong competitors globally. Computer vision is something. I think what people misunderstood is, computer vision doesn't mean it's just a bunch of multiplier accumulation. That's a too simplified way to look at it. Computer vision by itself is because it's continued to adapt because new algorithm continue to come out. And our approach is different than our competitors. We look at algorithms that we want to implement first, then we decide our silicon architecture. With this approach, we really can drive not only the performance as well as the die size. But more importantly, we can drive the power efficiency, which is critically important for all applications that we're working on. Not to mention that the small form factor is security camera but their power consumption is important. Even for automotive, right, telling the people to have a power consumption to handle 300 watt chip is difficult and that we can continue to show multiple X better power efficiency than our competitor is important for us. And our competitors today on the automotive side is, you mentioned Qualcomm and I think Mobileye and Nvidia there are very, very well known. On the security side, outside China, we don't see many of high-end competitors and a lot of our competitors staying on the low end side in China and Taiwan, there many of them. But on the mainstream and the high-end side, we don't see competitor. In China, in the past, our biggest competitor is HiSilicon. And the situation there is very unclear, right? In fact, that although HiSilicon cannot get a supplier on their foundries, but we continue to hear rumors about a different way to showcase their limitation. And we have no proof of that, but it's just a complicated situation we need to continue watch. But even in China, I think today, HiSilicon still is our biggest competitor, but there are other, many other smaller competitors there.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : And I don't see any questions coming through yet, so I'll just keep going. On this competition topic, Mobileye is one of your biggest competitors that will be in Forward-Facing ADAS, but they have such a dominant market share right now. So I think they have over 50% market share. So how someone like Ambarella expects to compete there? Or maybe explain 1 or 2 differences between the businesses where you think you have an advantage. And then again, like -- how do you expect to gain any share in this kind of like market controlled by Mobileye at the moment? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Right. So 2 things. In fact, 1 is really business model, that Mobileye has been shipping a black box solution to everybody. And everybody using the same technology, same solution, which is a problem for most of Tier 1 OEMs, and then we talk about our open platform, which help our customers to differentiate. I think that's one biggest reason people looking at us. The second reason is on the technology side, we are there competing side-by-side with Mobileye. For example, our video processing capabilities, definitely better than theirs, on the RGB camera and also that our computer vision performance is definitely the performance per watt, I think is definitely better than theirs. But however, what they have is they have a lot of data. They have a first mover advantage that's where we want to compete. And so I think what we need to do is continue to build up our competitive advantages, Oculii again is one of the reasons.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Okay. In that Forward-Facing ADAS market, can you size that opportunity? What could that mean long term? I don't know, I just think big numbers, I guess, units or market share-wise, how you think about it that growing? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Well, first of all, I really think that the adoption rate will continue to go up. So I think that very soon, when the ADAS solution getting cheaper and widely available, I think the adoption rate will go up. And I think that I won't be surprised that almost all the car has a ADAS system in a few years. So for us, really, the penetration need to focus on where we can differentiate usually, like I said, is technology-driven as well as business model. So just penetrate one big design win can give us a few percent of this huge market, and that's where we're counting on that. We need to continue to find a way to secure design win and helping our customers move into a production soon. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 09, 2021 / 1:00PM, AMBA.OQ - Ambarella Inc at Berenberg US CEO Conference (Virtual)

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : And the last comment, you're referencing maybe machine vision, some of the machine vision players, it's how big spot defects in factories and things like that, you think Ambarella could be useful in that sort of application. Is that what you're referencing there? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Yes. In fact, again, back to platform, we are not providing total solution. We are providing the platform so that helping those machine vision customers can move their software onto our platform and leverage our CVflow engine to using neural network-based solution to solve the same problem they are solving today. I think a lot of the machine vision company are moving to that direction. We are -- we need to prove to them that our platform can be useful and deliver much better performance than other platforms they are evaluating so that, that we can move into that direction. But definitely, we believe that we will be start seeing some of the companies are using our solution moving toward that direction.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Okay. Maybe we could take a high level, some -- maybe some high-level thoughts on just the model going forward with, you got this great top line growth coming and you're seeing that already. Can you talk about how the dynamics with the margins playing out? Your gross margins are 60%. Can you talk about -- is there a chance that those expand from here? And then secondly, where is the leverage in the model going forward? It sounds like if the top line is there, what are sort of the levers you can pull that you'll see that earnings really start to ramp? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Right. So from a gross margin point of view, we still think that our current guidance is right. We have -- our current corporate gross margin guidance will be our long-term gross margin. And the reason for that is our computer vision definitely gives a boost on the gross margin. But I think just like you said, on the low end side, there's a lot of competitors. And also, we need to continue to -- the ASP continue to -- basically every year, it need to go down, although with a short supply, we haven't seen that for a while, but we should assume that any silicon or probably ASP will go down or go up. So the only way we can maintain our gross margin is continue to introduce new products, and that's what we're doing so. I think we are very comfortable with our current gross margin guidance in the long term. From a leveraging point of view, I think the operating margin, we see a significant improvement in the last several quarters. And we believe that we're going to continue to show leverage. However, I think that we need to continue to invest at this time, like we're competing with Mobileye, Qualcomm and NVIDIA. And I truly believe that continue to invest on the technology is important for us. For example, we are going to continue to invest on 5 nanometers. We are evaluating 4-nanometer today. That's a huge investment. And also from a hiring point of view, we need to continue to boost up our technology on the computer vision as well as now with radar technology, too. So while we continue to increase our R&D expense, but we do believe that we can continue to show up leverage on operation margin, not as fast as last year, but we definitely think that 20% to 25% is a target that we want to hit in the future.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Yes. Okay. And what about -- a question I get too, is if there are -- is all this growth ahead? What about investing in capacity and -- you are fabless. But how do you think about invest -- having to invest in the company to keep up with all that growth? I guess where, I don't know where do you see any additional expenses down the line that you don't currently have? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Well, there are 2 things. First of all, in the short-term, I think that we need to -- instead of trying to invest around the capacity, which we need to continue to build out our inventory. Just be prudent that if something happens for any different reason, we have -- at least give us a buffer to react to. But however, in the long-term, I think that our expense will continue to focus on R&D and business development. . And that's where I think that would give us best return for our investors, particularly on the -- in the past, we continue to move forward with almost the leading edge of process node. And that definitely help us, and that's one way to continue to keep competitive. And but it becomes so expensive, not only just on a wafer taping out point of view, but also the R&D investment point of view, we need to build a strong [VI siting], strong software team that we can leverage this 5-nanometer or 4-nanometer technology. That's going to continue to be costly. But I think that's definitely worthwhile because we have proved that we know how to build chip, we know how to specify chip. As long as we can continue to do that, the high investment on the R&D side will turn out to be the ROI for the investors.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : And I don't see any other questions and I'm running short on questions now. So maybe I'll just finish off with one last one. And it's Fermi, you've done a great job. This company is -- things are really starting to perk up here. So at this juncture, what keeps you up at night? What do you think is the bigger risk here? Is it competition, geopolitical, I don't know, just what -- what do you think about? Where are you most on guard on related to risk? Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Well, competition is always in my mind, right? Because for a company like Ambarella size to compete big company, is always a challenge. But however, we know how to do it. We have done that for 17 years, so that didn't scare me. What really keeping awake in night is whether we are moving to the right direction from a technology and market point of view because things changed so quickly, right? 5 years ago, nobody can see a computer vision come to this point. And luckily, and strategically, we invest heavily on that and it helped us to come to this point. And now for any semiconductor company, when you build a product, you need to forecast what happen in the next 3 to 5 years because every silicon take that long to develop and really is whether I got all information, like I made the right decision from which market to go after, what's the technology going to -- that we need to build, where to put our R&D resource. That's where I think that I spend most of my time.

Question: Andrew Edouard Buscaglia - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Okay. Okay. Well, we're just right out of time here. So thank you, guys. Thank you, Fermi. Thank you, Louis, for doing this. We really appreciate your time. I hope we can have you back again next year. Hopefully, in person. Feng-Ming Wang - Ambarella, Inc. - Co-Founder, President, CEO & Executive Chairman Thank you, Andrew.