Ambarella's (AMBA) CEO Fermi Wang On Q2 2015 Results - Earnings Call Transcript

Sep. 4.14 | About: Ambarella (AMBA)

Ambarella (NASDAQ:AMBA)

Q2 2015 Results Earnings Conference Call

September 4, 2014, 05:00 PM ET

Executives

Deborah Stapleton - Investor Relations

Fermi Wang - President and Chief Executive Officer

George Laplante - Chief Financial Officer

Analysts

Jay Srivatsa - Chardan Capital

Suji De Silva - Topeka

Kevin Cassidy - Stifel

Quinn Bolton - Needham & Company

David Williams - Ascendiant Capital

Joe Moore - Morgan Stanley

Charlie Anderson - Dougherty & Company

Ross Seymore - Deutsche Bank

Operator

Good day, ladies and gentlemen, and welcome to your Ambarella’s Q2 fiscal year earnings conference call. [Operator instructions.] I would now like to introduce your host for today’s conference, Deborah Stapleton. Ma’am, you may begin.

Deborah Stapleton

Thank you, operator. Good afternoon, everyone, and welcome to Ambarella’s second quarter fiscal year 2015 financial results conference call. Thank you for joining us today. Our speakers are Dr. Fermi Wang, president and CEO, and George Laplante, CFO.

The primary purpose of today’s call is to provide you with information regarding our fiscal second quarter. The discussion today and the responses to your questions will contain forward-looking statements regarding our financial prospects, market growth, and demand for our solutions, among other things.

These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements.

These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents that we filed with the SEC, including the Annual Report on Form 10-K that we filed on April 4, 2014 for the 2014 fiscal year and Form 10-Q filed on June 6, 2014, and the form 10-Q for the second quarter of fiscal 2015 that will be filed shortly.

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

I would now like to turn the call over to Dr. Fermi Wang.

Fermi Wang

Thank you, Deborah, and good afternoon everyone. We are very pleased with our fiscal Q2 2015 financial results. Q2 revenue was $47 million, up 24.6% from the $37.7 million we reported in the second quarter a year ago.

Second quarter non-GAAP net income was $11.9 million, or $0.37 per diluted ordinary share. This compares with non-GAAP net income of $7.7 million or $0.26 per diluted ordinary share for the same period in fiscal 2014.

I would like to discuss some of our products and marketing highlights, then I will turn it over to George, who will lead the discussion of our second quarter financial performance and our guidance for Q3.

We are continuing to see strong growth from IP security cameras, driven by increasing demand for higher resolution and higher featured cameras in the professional camera market as well as increased demand for cloud-based home monitoring and security cameras.

Volume growth continues across all geographic regions, with the strongest growth in China, driven by market leaders including Hikvision, [unintelligible], and [unintelligible].

During the second quarter, many of our leading professional IP camera customers began volume commercial shipping of the 4K or ultra-HD cameras that were announced at ISC West 2014 Security Exposition in April. These cameras are based on our S2 camera SoC. In addition to its 4K capabilities, the S2’s ability to dewarp images, to enable 180 degree or 360 degree panoramic viewing, is proving very popular for the latest generation of cameras.

For example, Bosch, the leading suppliers of IP surveillance cameras based in Germany, introduced its new DINION IP ultra 8000 MP family of cameras, featuring 4K ultra-HD, 12 megapixels, and high dynamic range capabilities.

Additionally, we are seeing strong interest in our new S2L IP camera SoC family, which was introduced during the ISC West Exposition. The S2L includes a wide angle lens dewarping, high dynamic range processing, and Ambarella’s SmartAVC low bitrate streaming technology.

During the second quarter, we expanded the S2L product range with the new S2LM, a small form factor low power solution focused on home monitoring and security camera applications.

The demand for home monitoring and security IP camera applications continues to grow, enabled by cloud-based video storage and remote viewing via smartphones or tablets. In addition to cameras already in the retail market, including those from Dropcam, Philips, and Swann, we continue to see new opportunities with service providers in the U.S. and Europe.

This market is being driven by the requirement for HD video remote monitoring via smartphones and advanced analytics, such as activity detection. We are well-positioned to provide SoC solutions that meet all of these requirements.

In summary, we anticipate continued growth in the IP security camera from both the professional and consumer markets. We expect that the transition from the older generation of standard-definition analog cameras to HD IP security cameras to continue as prices converge. Additionally, based on the strong demand for higher resolution and advanced features, we expect continued revenue growth for our S2 and new S2L camera SoCs that enable ultra HD, panoramic viewing, and advanced analytics capabilities.

In the wearable sports camera market, our Q2 sales were driven by market leader GoPro, with its highly successful white, silver, and black Hero 3 plus camera models. We believe this market will continue to grow as consumers discover more applications for hands-free cameras beyond just action sports.

In the UAV or quadcopter market, manufacturers are increasingly offering integrated high definition cameras as airborne video recording becomes the killer app for these products. During the quarter, Ambarella shipped both the A5S and A9 camera SoCs for the next generation of HD and ultra HD cameras. Ambarella’s A9 provides the ultra HD resolution recording, high frame rate, and the wide angle viewing required for outstanding video quality.

We are also seeing revenue growth opportunities in wearable police cameras. These body-worn security cameras support continuous video recording of events, offering protection and documentation for both the police and the public. Ambarella’s A7LW SoC solution provides full HD recording with clear images even in low light conditions, and low power operation to enable extended battery life.

While volumes are initially dominated by sales into the Asian markets, we expect wearable security cameras to provide additional opportunities for Ambarella in other regions, including the U.S. and Europe.

In the automotive aftermarket, Ambarella provides camera SoC solutions for video camera recorders, or dash cams. These cameras have traditionally been sold primarily in Russia, China, Taiwan, and South Korea, but we are now seeing additional opportunities with customers targeting the U.S. and European markets.

Additionally, we are seeing successful adoption of our A7LA automotive camera SoC in the new generation of dash cameras that include wifi connectivity, video analytics, and multicamera viewing. During the second quarter, Chicago-based Cobra Electronics corporation, a leading global designer and marketer of mobile communications and navigation products, introduced its CDR 900 drive HD dash cam with wifi.

Based on Ambarella’s A7LA automotive camera SoC, the CDR 900 captures both super HD and 1080p HD video’s high quality imaging, even during the nighttime. Its wifi functionality allows the user to connect and stream live and record footage directly to the user’s iOS or Android device to instantly view and share the footage.

In Korea, Thinkware, a leading supplier of automotive camera recorders, introduced its [QSD] 900 two channel dash cameras, based on Ambarella’s A7LA automotive camera SoC. The QSD 900 supports full 1080p resolution video recording through both the windshield and the rear window. It also supports an extensive set of advanced features, including super night vision, lane departure warning system, voice recognition, and wide angle video recording of up to 140 degrees.

Looking forward, we expect the automotive dash camera market to continue to face economic challenges in Russia and competitive price pressure in China. However, with new opportunities in the U.S., European, and Japanese markets, as well as the successful adoption of our A7LA solution for cameras with more advanced features, we see opportunities for revenue growth in this market.

In conclusion, we are extremely pleased with our second quarter execution and the financial results. We plan to continue to invest in the development of leading edge SoC, targeting both our traditional camera markets and the new opportunities such as UAV, wearable cameras, and the home monitoring and security IP cameras.

With that, I will hand it over to George to discuss our financials.

George Laplante

Thanks, Fermi, and good afternoon everyone. Today, I will discuss the financial highlights for the second quarter of fiscal year 2015 ending July 31, 2014. I will then review the financial outlook for Q3 of fiscal year 2015, which ends on October 31, 2014. During the call, I’ll discuss non-GAAP results and ask that you refer to today’s press release for a detailed reconciliation of GAAP to non-GAAP results.

For non-GAAP reporting, we have eliminated stock based compensation expense as adjusted for income taxes. As we have discussed in the past, the company has seasonality to both its revenue and gross margin, so I will include year over year comparisons for certain key operating metrics to assist in the understanding of changes in our business.

Our Q2 2015 revenue of $47 million represents an increase of 24.6% over the $37.7 million of revenue in the same period in the prior year. Camera market revenue is estimated to be 93% of Q2 revenue, compared to 90% of the same period in the prior year.

Our professional IP security market, along with the continued development of the consumer IP security market, combined to be the largest driver of year over year revenue growth, once again ending the quarter as the largest camera segment, based on both revenue and units.

Overall, the IP security market revenues were sequentially flat, with professional IP security down moderately due to some inventory balancing in Asia, offset by increases in professional security in Korea, and consumer IP security revenues overall.

Although we are seeing competition at the low end of the Asia IP security market, our A5S and S2 products continue to support growth in the expanding mid and high end of the market. The wearable sports camera market increased both sequentially and year over year, reflecting initial orders for the holiday season camera builds. In addition, higher shipments than forecasted into the UAV or quadcopter market benefitted revenues in the quarter.

Q2 automotive market revenues increased sequentially but remained below Q2 of the preceding year. The automotive market in Russia, where higher end products are more popular, has experienced softness, which we believe is a result of weakening economic conditions in Russia.

Second quarter infrastructure revenues were flat compared to the previous year, and remain below the preceding quarter, as system manufacturers continue to experience soft markets in most regions. Non-GAAP gross margins for Q2 of 2015 increased to 65.1%, compared to 62.7% in the immediately preceding quarter, and 61.9% in the second quarter of the prior year.

Compared with Q1, gross margins improved, primarily due to the increase in revenues associated with shipments of our 4K versions of the S2 and A9 chips into the security and UAV or quadcopter markets. Non-GAAP operating expenses for the second quarter were $17.5 million, compared to $16.9 million for Q1 2015 and $14.8 million for Q2 of the prior year.

The increase in opex from the previous quarter reflects the ramp of the 14 nanometer chip development projects, as well as an increase in investment in our [SOX] compliance program. This was offset by approximately $300,000 in benefits received for custom development work that reduced R&D expense in the period.

Non-GAAP net income for Q2 2015 was $11.9 million, or $0.37 per diluted ordinary share, compared with non-GAAP net income of $7.7 million or $0.26 per diluted ordinary share for the same period in the previous year.

The non-GAAP effective tax rate in Q2 2015 was 9.2%. As the federal government has not renewed the R&D tax credit for 2014, we are forecasting our effective tax rate to be between 10% and 11% for the year. In the second quarter, the non-GAAP earnings per ordinary share are based on 31.9 million diluted shares as compared to 29.8 million diluted shares for Q2 2014.

Looking at the first half of fiscal year 2015, our revenues of $87.9 million and non-GAAP net income of $19.8 million represent increases of 22.7% and 42.4% respectively over the results of the same period in the prior year.

Total headcount at the end of Q2 2015 was 507, compared to 501 at the end of the previous quarter, with about 352 employees dedicated to engineering. Approximately 76% of our total headcount is located in Asia, primarily in Taiwan and China.

We ended Q2 with cash and marketable securities of $166.5 million, adding $8.6 million of cash from operations in the quarter.

Total accounts receivable at the end of Q2 2015 were $26.8 million, or about 63 days sales outstanding. This compares to accounts receivable of $21.3 million or 46 diluted shares outstanding in the prior quarter.

Net inventory at the end of Q2 was $13 million, or about 64 days, compared to $10 million or 61 days at the end of Q1. Inventory levels increased in preparation for the normal seasonal increase in Q3 shipments. Accounts receivable and inventory remain in line with the company targets.

Ambarella uses WT Microelectronics as its logistics supplier for distribution to the majority of our ODM and OEM customers. For the quarter ended July 31, 2014, sales to WT represented 65% of our revenue compared to 59% for the same period in the previous year.

Chicony Electronics Company, a manufacturer of camera products with multiple OEM customers, as well as for their own distribution, represented 24% of revenue for Q2 of fiscal 2015, compared to 28% for the same periods in the prior year. WT and Chicony were the company’s only 10% customers.

I would now like to discuss the outlook for Q3 of fiscal year 2015. We expect revenues for the third quarter of fiscal year 2015, ending October 31, 2014, to be between $60 million and $64 million. This represents an increase of 31% and 39% over Q3 of last year.

Q3 camera revenues are estimated to be between 94% and 96% of total revenue for the quarter, compared to 87% in the same period in the prior year. Q3 revenues reflect the seasonal ramp of consumer camera production for the holiday season, improvement in ASPs to transition to new product families, as well as an increase in professional IP security globally.

Our wearable sports camera and IP security markets, both professional and consumer, are expected to increase both sequentially and year over year. We expect automotive revenues to increase both sequentially and year over year in Q3.

The automobile market revenues reflect increases in Korea and China, partially offset by softness in the Russian market, as we discussed earlier.

Infrastructure will be down sequentially and year over year. We continue to see softness in the infrastructure market, at least through the first half of our fiscal year 2016.

Our third quarter forecast reflects high demand from our customers for consumer based products in anticipation of strong sales during the holiday season. Depending on the success of holiday sell through, we could see inventory balancing at customers during Q4 and Q1.

We estimate Q3 non-GAAP gross margins to be between 60% and 62%, compared to 65.1% in Q2 of fiscal year 2015 and 63.8% in Q3 of the prior year. Camera market gross margins are expected to be lower compared to the previous quarter as consumer based products become a larger portion of Q3 revenue.

As compared to the previous year, gross margin has declined, primarily as a result of the reduction of infrastructure revenue as a percentage of total revenue.

We expect non-GAAP net income for the quarter to be between $16 million and $18 million. We are using an estimated non-GAAP annualized effective tax rate of 11% for net income amounts. We estimate our diluted share count for Q3 to be approximately 32.2 million shares.

I would like to thank everyone for joining our call today, and now I will turn it back to operator to manage the Q&A session.

Question-and-Answer Session

Operator

[Operator instructions.] Our first question comes from Jay Srivatsa of Chardan Capital.

Jay Srivatsa - Chardan Capital

In terms of the margins that you’ve guided for, could you address whether it’s all from the consumer business, or is there any impact on competitive price pressure in the IP security market?

George Laplante

The margins in Q3 are normally lower, and it’s really from two things. First of all, the mix of products heavily towards consumer business as well as the lower percentage of infrastructure business this year as compared to the previous year.

Jay Srivatsa - Chardan Capital

Fermi, in the past you’ve talked about competition in the low end of the market. What has changed in the last quarter? Can you give us an update in terms of where things are, in terms of Hisilicon and some of the other guys, and how are you positioning yourself looking forward in the IP security market in China?

Fermi Wang

Well, from that point of view, I don’t think not much changed from our last report. We continue to see Hisilicon be aggressive on the pricing side, and in fact, they have a lot of smaller competitors coming out. But you know, I think at this point, I still view Hisilicon as the main competitor to us.

And from our strategy point of view, that didn’t change either. We continue to believe that we want to continue to ship better features and better performance products than our competitors, so that we can grab the shares on the high end and on the mainstream side, and continue to use that to leverage it to provide a competitive price to our larger customers on the low end products. And I think from that point of view, nothing has changed much.

Operator

Your next question comes from Suji De Silva from Topeka.

Suji De Silva - Topeka

First of all, on the 4K products, what percent of the revenue or unit mix do you think those can become exiting this fiscal year? And do you think there’s channel fill going on in these two quarters which would kind of make the ramp of those front-end loaded?

Fermi Wang

First of all, I think that 4K video has become more and more popular, and we believe that over time, all of our markets will move to 4K. In fact, we’ll start shipping 4K, like we said, to professional IP security, and we’re going to start shipping to UAV, and we believe that in the short term you’re going to see other markets pick up.

In fact, the funniest part is that the infrastructure will be the last one to pick that up, unlike before. But I think overall, over time, 4K will be the mainstream product for all of us. And we haven’t broken out the 4K product alone in terms of percentage of revenue, but I think it will become a higher percentage of our products in the future.

Suji De Silva - Topeka

And do you think there’s an initial channel fill here that makes the build front-end loaded?

George Laplante

I don’t know if it’s necessarily associated with 4K, but we have seen a lot more optimism than we saw four months ago in the consumer spaces. And so there is a lot of product going into the channel for seasonal build. So depending on how the sell through us during the holidays, I think there is the potential for inventory adjustments in Q4 and Q1, as the manufacturers adjust based on holiday sell through. So I think that is a potential issue to watch.

Suji De Silva - Topeka

And the auto and police safety areas, it sounds like you’re strong in Asia and growing into the U.S. or Europe today? Correct me if that’s wrong. And if so, will it be less or more competitive in the U.S. and Europe markets versus Asia?

Fermi Wang

And this is automotive that you are saying?

Suji De Silva - Topeka

Automotive and police safety, they sound like they both try to expand -- US.

Fermi Wang

I think the majority of the automotive markets happening in the U.S. and Europe today, basically it’s ODM from China and from Russia areas. So I think you’re going to continue to see there’s a product in the high end to the low end. So we believe that we are very competitive in terms of performance and feature in the high end and mainstream. But on the low end side, we also believe that the price pressure is there. It doesn’t matter if it’s in the U.S. or Europe.

Operator

Our next question comes from Kevin Cassidy from Stifel.

Kevin Cassidy - Stifel

I wonder if you could give us a little more update on your 14 nanometer process development. When do you expect that to come out, and is it on schedule with your expectations? And what kind of demand are you looking for?

Fermi Wang

First of all, 14 nanometer is still one of our main focuses on the R&D side this year, and it’s essential to us, because we believe when we deliver our 14 nanometer products for our next generation camera products, it will help us continue to improve our performance and also increase the gap between us and competitors in terms of power consumption and video performance.

And the current schedule, we are still on track, and we believe that we will have product coming out next year.

Kevin Cassidy - Stifel

And in the last conference call, you had talked about some of the quarter would be dependent on ramping of the A9 and S2 products. Is the ramp as expected, or better than expected? It seems like it was better than expected?

George Laplante

Yeah, we were at the high end of our hopes there. We did sell the A9 and S2 in the quarter. The S2 is into the security business, and the A9 volumes into the quadcopter marketplace, as well as the A5S. So we did meet our expectations.

Kevin Cassidy - Stifel

And do you expect to continue to be stronger gross margins in your older products?

George Laplante

Yes. As we introduce, normally our new products have higher gross margins on the front end, yes.

Operator

Our next question comes from Quinn Bolton of Needham & Company.

Quinn Bolton - Needham & Company

Just wanted to ask a clarification on the consumer build. Was that across both sports camera and quadcopters? Are you seeing better enthusiasm than three or four months ago? Or is it specific to one or the other areas?

George Laplante

It’s across all the consumer products, including automobile in certain regions. So I think you can look at home security, you can look at quadcopters. I think sports cameras, normal build for the holiday season. So I think it’s across multiple markets.

Quinn Bolton - Needham & Company

And was the A9 shipping only in the quadcopter? Or have you started to ship that also into sports cameras?

George Laplante

We’re shipping it across multiple markets now.

Quinn Bolton - Needham & Company

And just lastly, I think you referenced some better ASPs as being one of the reasons behind the better gross margins. As you look forward, you have the consumer ramp for the holiday. I imagine the 4K products, especially A9, become a richer part of the mix. Do you think that leads to just general better pricing across the sports camera and quadcopter markets? Or do you think pricing across all the products are likely to be more flattish, despite the ramp of 4K solutions at the high end?

George Laplante

We’re also seeing a transition from the A5S to the A7L, so we’re seeing multiple product families transition. So I would expect ASPs in Q3 to be higher than Q2.

Operator

Our next question comes from David Williams of Ascendiant Capital.

David Williams - Ascendiant Capital

I wanted to get your take, as we start thinking about, in the sports camera market, and maybe a potential upgrade cycle or refresh cycle that many expect to happen next year, and kind of how we would expect the revenue to begin the flow through? Would we be seeing any of that maybe this quarter or next quarter? Or is this really more about the seasonal inventory build than it is maybe a refresh cycle?

George Laplante

We don’t discuss our customer launch cycles across any of the product lines, but you can assume we are having our normal seasonal build cycle for Q3.

David Williams - Ascendiant Capital

Can you walk us how that revenue might flow in, if we were talking about a refresh cycle to happen in, let’s say, Q3? When would you start seeing that benefit? Would that be a Q2 event? Or maybe a Q1 event?

George Laplante

Again, we really don’t talk too much about how the products go out to our customers in preparation for their launch. It ends up to be pre-announcing our customer products, so we tend not to discuss that.

David Williams - Ascendiant Capital

And secondly, I wanted to think maybe on a longer term basis here, as we think about the infrastructure part of your business really starting to pick up maybe in the second half of next year. What do the margin trends look like, thinking about the consumer and the drag that those may be placing on margins. And then of course the high margin infrastructure business. If we think about this maybe four to six quarters out, how do you think margins, or what kind of benefit could we see as we get into maybe middle to end part of next year?

George Laplante

I think it’s the timing of the 4K upgrade and HEVC upgrade in infrastructure. When that starts, we would see similar margins to what we have seen in the past. When that starts, though, and how that matches against the ramp in the consumer businesses, is difficult to say. So for instance, we’ve said that in a very high ramp in consumer business, that obviously would pull down margins. But that could be offset by infrastructure ramp.

So we haven’t talked too much yet about next year’s margins, but at this point, we don’t see a significant change in the first half and I would say depending on the timing of the holiday season and the consumer products against infrastructure, we may see a second half deterioration.

Operator

Our next question comes from Joe Moore of Morgan Stanley.

Joe Moore - Morgan Stanley

Historically, you’ve talked about quadcopter as part of another segment, and it seems like it’s become pretty prominent. Can you talk about that market a little bit and the size, and maybe if you can, potential customers we should look to as being important?

Fermi Wang

I think probably last quarter we talked about we started shipping A5S solution to PGI. I believe they are one of the leading suppliers on the quadcopter side. And from there, we’ve had multiple design wins that we haven’t talked about, based on the A7 and A9 solutions. And overall, we think this market has interesting application, because we started seeing quadcopters being mentioned in many different type of applications, from commercial to consumer.

And also, the importance of that is video is really the killer app on the quadcopters. We love video, but quadcopter is just a toy. With quadcopter, it becomes a very useful tool for many different reasons. And on top of that, the video requirement on the quadcopter requires high resolution and a very high frame rate, because you’re thinking about the speed of the quadcopter and how high the altitude that they have to fly at really requires high performance video.

So with that, it really positions us very well in that market, and we believe, based on the current ramp of our current customers, we are very optimistic about how this market continue to development. And although the volume is still not as big as other markets, we think that’s a market we’re going to continue to watch and continue to invest.

Joe Moore - Morgan Stanley

And then in the auto and security markets, when you talk about lower end competition coming in, how do you balance out where you’re willing to let those margins go? Because you’re obviously seeing a lot of margin upside from the higher end product. Is there any thought of using that to be more aggressive on the low end? How do you make those decisions about what’s something that you want to pursue, and what you don’t, in the lower end of the market?

Fermi Wang

I think it’s a very good question. We continue to compete on price on the low end, but not to all the customers. We only offer very, very competitive price for our key customers, that really give us, from the high to low end of products. So for the customer who is willing to work with on the high end to mainstream to lower end products, we are willing to give them a very competitive price, so that they can compete with products with our competitors product line. So based on that, we’re really very selective on the customers we want to offer those. But at the same time, it really helps us build a stronger partnership with our customers.

Operator

Our next question comes from Charlie Anderson of Dougherty & Company.

Charlie Anderson - Dougherty & Company

My suspicion with the gross margin is that ASPs are up in the camera business on a year on year basis. Is that true? And if so, could you maybe help us qualitatively with how much?

George Laplante

We don’t give exact numbers on ASPs, and actually, in Q2 ASPs were reasonably flat year on year. We expect to see stronger ASPs from a mix of new products in Q3.

Charlie Anderson - Dougherty & Company

So if that’s the case, maybe help us on where you’re getting the benefit on the cost line, in terms of generating these higher margins.

George Laplante

It’s primarily from a mix products. So the mix of higher end versus lower end products. Mix can have a pretty dramatic impact.

Charlie Anderson - Dougherty & Company

And then on the auto OEM market, I wonder if you guys could talk about whether some of the opportunities there and the timeframe when the realization of some of those opportunities are for you on the OEM side of the house?

Fermi Wang

Like we said before, OEM is still a long term project for us. I think there are multiple things happening right now. First of all, we started seeing that OEMs started demanding video recording associated with [NS] solutions. So I think as long as they require recording, it really helps us to position ourselves in the OEM business. We start seeing people building dash cams into the OEM business in Europe, and in Asia. Although it’s a small body, I think that’s very encouraging news to us.

At the same time, we still believe that we want to target automotive OEMs in a very long term project for us. For that market, video has to be surround video, like you have multiple cameras, you put multiple cameras together. In addition to just capturing video and recording video, we believe we need to provide video [unintelligible] on top of that. And with that, I think it’s going to be a multiple year product, and to not only put design in, but also get it to [MP].

Charlie Anderson - Dougherty & Company

I think you made a reference in the script to wearable security and how that’s an interest market for you. Obviously, there’s a lot of enthusiasm in the market for these so-called cop cameras. I wonder if you could talk about what the capacity of that market is to date, and if you have specific products to address that type of a market going forward.

Fermi Wang

Interestingly, we started seeing this market popping up not in the U.S., but in Asia, a couple of quarters ago. In fact, we have multiple [unintelligible] in Asia building these kind of cameras and selling them quite well. But we started seeing traction in the U.S. and Europe just recently, and we have started seeing a lot of OEMs in the U.S. asking for [unintelligible] solutions for Asia, to speed up their first generation products. So I think the momentum is there. We’ve started seeing a lot of interest. I think hopefully working with the [ODMs], we can provide some solutions quickly for those U.S. and European OEMs.

Operator

Our next question comes from Ross Seymore of Deutsche Bank.

Ross Seymore - Deutsche Bank

If you could help a little bit on the magnitude in the guidance for the third quarter. You talked about the sports camera, the auto, pretty much everything but infrastructure being up. Any sort of hierarchy on what you think is going to grow faster or slower, and what the drivers are behind that would be helpful.

George Laplante

I think in the quarter we’re seeing a couple of things. We’re seeing all the consumer based products, so you’re looking at the normal growth for sports cameras. We’re also seeing consumer IP security growth. In addition, we’re seeing a significant increase in the professional IP security from Q2 to Q3 globally. I think those are the main drivers for the revenue increase.

Ross Seymore - Deutsche Bank

And as I look at gross margin side of things, I know you talked in the answer to a previous question, about the ASP rising in the third quarter. Are higher ASPs in most cases in your business model equivalent to higher gross margins? Or is that a connection that we shouldn’t necessarily make?

George Laplante

We’ve said in the past that connection can be made on new product launches. So normally, we would launch with higher ASPs at the initial stage of a product, because we give price discounts based on volume over its life cycle. So on most new products, we would have higher ASPs would match with higher margins. And in this quarter, we have several product families going out, transitioning to new products. So we’re getting a positive impact from that.

Ross Seymore - Deutsche Bank

And the opex side of the equation, it seems like you’re implying somewhere around $19 million or so. Am I doing the math right? And how should we think about how that number grows for the rest of the year?

George Laplante

I think it’s pretty much the way we left it last time. We’re expecting to exit the year around the $19 million run rate. If you take out the $300,000 upside we got, we were at about $17.8 million in Q2. So we’ll see a ramp between now and the end of the year to around that number.

Operator

Our next question comes from Jay Srivatsa of Chardan Capital.

Jay Srivatsa - Chardan Capital

Fermi, earlier this year, at the Consumer Electronics Show, you had a demo of your partnership with Google and Helpouts. Can you give us an update on where things are there? And then also, can you comment on the recent acquisition of Google of Dropcam, and what that does to your participation in the security business?

Fermi Wang

First of all, on the wearable cameras, that was Google, I think the [unintelligible] continues, and until Google can announce a product, I don’t think we can really talk about their plans and how fast we can see revenue. But I don’t think by the end of the year we’ll see anything on that front.

But on the [Nest] acquiring Dropcam, I think the older current products is going to continue as planned. I don’t see any reason that will change. And we are talking to the Nest management as well as the Dropcam management on the new product line and the new map, and hopefully we can develop a new product in the future with them. And we are definitely looking forward to the possibility of working with them. And from a financial point of view, I don’t think there’s anything to change.

Operator

And at this time, I’m showing no further questions. I’d like to turn the call back to management for any closing comments.

Fermi Wang

Thanks for everybody joining us today. I want to send a special thanks to all our employees for their continued dedication and hard work to deliver such outstanding performance. Thank you. Bye for now.

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