AMBARELLA, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto for the fiscal year endedJanuary 31, 2021 and management's discussion and analysis of our financial condition and results of operations included in our Annual Report on Form 10-K for the 2021 fiscal year filed with theSecurities and Exchange Commission , orSEC , onMarch 31, 2021 . This Quarterly Report on Form 10-Q, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations", includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words "would," "could," "will," "may," "expect," "believe," "should," "anticipate," "outlook," "if," "future," "intend," "plan," "estimate," "predict," "potential," "target," "seek," "project," "forecast," "continue" or "foreseeable" and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. Such statements include, but are not limited to, statements concerning our market opportunity and our ability to compete in such markets, our product strategy, our ability to develop and introduce new solutions, our future financial and operating performance, our sales and marketing strategy, our investment strategy, research and development, our customer and supplier relationships and inventory levels, industry trends, our cash needs and capital requirements, our repurchase programs, our expectations about taxes and operating expenses, the availability of third-party components and economic and political conditions. These statements reflect our current views with respect to future events and our potential financial performance, and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Quarterly Report on Form 10-Q. These factors include, but are not limited to: risks associated with revenue being generated from new customers or design wins, neither of which is assured; our ability to retain and expand customer relationships and to achieve design wins; the ongoing and potential impact of the COVID-19 pandemic on our operations or the operations of our supply chain or our customers; risks associated with the overall economy, including escalating trade tensions between theU.S. andChina ; the commercial success of our customers' products; our growth strategy; fluctuations in our operating results; our ability to anticipate future market demands and future needs and preferences of our customers; our ability to introduce new and enhanced solutions; the expansion of our current markets and our ability to successfully enter new markets; anticipated trends and challenges, including competition, in the markets in which we operate or seek to operate; our expectations regarding computer vision; our ability to effectively generate and manage growth; our ability to retain key employees; the potential for intellectual property disputes or other litigation; the risks described elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with theSEC . We make these forward-looking statements based upon information available on the date of this Quarterly Report on Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations.
Overview
We are a leading developer of low-power system-on-a-chip, or SoC, semiconductors
providing powerful artificial intelligence, or AI, processing, advanced image
signal processing and high-resolution video compression. Since inception, we
have primarily served human viewing applications with video and image processors
for enterprise, public infrastructure and home applications, such as internet
protocol, or IP, security cameras, sports cameras, wearables, aerial drones, and
aftermarket automotive video recorders. In the last several years, our
development efforts have focused on creating advanced AI technology that enables
edge devices to visually perceive the environment and make decisions based on
the data collected from cameras and, most recently, other types of sensors. This
category of AI technology is known as computer vision, or CV, and our CV SoCs
integrate our state-of-the-art video processor technology together with our deep
learning neural network processing technology, which we refer to as CVflow™. The
CVflow-architecture supports a variety of CV algorithms, including object
detection, classification and tracking, semantic and instance segmentation,
image processing, stereo object detection, terrain mapping, and face
recognition. CVflow can process other sensor modalities including lidar and
radar, and allows customers to differentiate their products by porting their
own, or third party, neural networks and/or classical CV algorithms to our
CVflow-based SoCs. Our SoC designs fully integrate AI, computer vision
functionality, HD video processing, image processing, audio processing, and
system functions onto a single chip, delivering exceptional video and image
quality at high compression rates, differentiated functionality and low power
consumption. These CV-based technologies are allowing us to address a broader
range of markets and applications requiring AI video features, including IP
security cameras, a variety of automotive cameras, consumer cameras, and
industrial and robotic markets and applications. We anticipate that our CV
technology will also enable us to capture more content per electronic system.
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-------------------------------------------------------------------------------- Our development efforts are focused on SoCs that provide both human viewing and computer vision functionality. As a result, we believe that our future revenue growth, if any, will significantly depend upon our ability to expand within camera markets with our AI and computer vision technology, particularly in the professional IP security and home security and monitoring camera markets, as well as emerging markets such as AI-enabled security cameras, AI-based driving applications, including driver monitoring systems, advanced blind spot detection, object detection, and deep learning algorithms for HD mapping solutions, OEM automotive advanced driver assistance systems, or ADAS, applications, and industrial and robotics markets. We expect our research and development expenditures to increase in comparison to prior periods as we devote additional resources to the development of innovative video and image processing solutions with increased functionality, such as AI and CV capabilities, and as we target new markets. We sell our SoC solutions to leading original design manufacturers, or ODMs, and OEMs globally, and in the automotive market, we also sell to Tier-1 suppliers. We refer to ODMs and Tier-1 automotive suppliers as our customers and OEMs as our end customers, except as otherwise indicated or as the context otherwise requires. Our sales cycles typically require a significant investment of time and a substantial expenditure of resources before we can realize revenue from the sale of our solutions, if any. Our typical sales cycle consists of a multi-month sales and development process involving our customers' system designers and management and our sales personnel and software engineers. If successful, this process culminates in a customer's decision to use our solutions in its system, which we refer to as a design win. Our sales efforts are typically directed to the OEM of the product that will incorporate our video and image processing solution, but the eventual design and incorporation of our SoC into the product may be handled by an ODM or Tier-1 supplier on behalf of the OEM. Volume production may begin within 9 to 18 months after a design win, depending on the complexity of our customer's product and other factors upon which we may have little or no influence. In general, design cycles will be longer in the OEM automotive and industrial and robotics markets than in the IP security and consumer device markets. Once our solutions have been incorporated into a customer's design, they are likely to be used for the life cycle of the customer's product. Conversely, a design loss to a competitor will likely preclude any opportunity for future revenue from such customer's product. Even if we obtain a design win and our SoC remains a component through the life cycle of a customer's product, the volume and timing of actual sales of our SoCs to the customer depend upon the production, release and market acceptance of that product, none of which are within our control. A portable consumer device typically has a product life cycle of 6 to 18 months, while an IP security camera typically has a product life cycle of 12 to 24 months. We anticipate that product lifecycles will typically be longer than 24 months in the OEM automotive and industrial and robotics markets, as new product introductions occur less frequently in these markets.
Financial Highlights and Trends
• We recorded revenue of
and nine months ended October 31, 2021 , respectively. This represented
increases of 64.3% and 50.2% for the three and nine months ended
October 31, 2021 , respectively, as compared to the same periods in the
prior fiscal year. The increases in revenue were primarily
attributable to continued adoption of our CV-based solutions in the IP
security and automotive camera markets. In the professional IP
security camera market, strong growth in the Asia and North America
regions, together with continued sales penetration into the Europe
region, resulted in a significant revenue increase in thismarket. In
the home IP security camera market, revenue growth continued to be led
by the North America region. A recovery in the automotive OEM and
aftermarket applications in the Asia region, as well ascontinued
adoption of our SoCs in the automotive fleet market, contributed an
increase in revenue in the automotive markets. The increased revenues
from the IP security and automotive camera markets were partially
offset by decreased revenues in the consumer camera markets.
• We recorded operating losses of
three and nine months ended October 31, 2021 , respectively, as
compared to operating losses of $16.2 million and $47.2 million for
the three and nine months ended October 31, 2020 , respectively. The
decreased operating losses were primarily due to increases inrevenue
and gross profit, partially offset by increased operatingexpenses.
The increased operating expenses, mainly in support of automotive
markets and applications for our computer vision-based solutions,
related primarily to increased personnel costs associated with
headcount growth and benefit programs as well as increased engineering
related costs, partially offset by decreased chip tape-out costs due
to the timing, complexity and number of chips in development.
• We generated cash flows from operating activities of
the nine months ended October 31, 2021 , as compared to $18.3 million
for the nine months ended October 31, 2020 . The decreased cash flows
from operating activities were primarily due to increasedinventory
purchases associated with longer supply chain lead times,increased
accounts receivable associated with the timing of sales and decreased
liabilities associated with the timing of payments to oursuppliers.
The decreased cash flows from operating activities werepartially
offset by a lower net loss for the nine months ended October 31, 2021 .
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• During the three months ended
our marketable debt security investments for total cashconsideration
of $215.1 million to partially finance the acquisition of Oculii
Corporation , or Oculii Corp. , which was completed on November 5, 2021 .
Factors Affecting Our Performance
Spread of COVID-19 Could Adversely Affect our Business in aMaterial Way . The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on travel and the imposition of remote or work from home conditions in many of the locations where we have offices. While we have not yet experienced a significant disruption of our operations as a result of the COVID-19 pandemic, if the remote or work from home conditions in any of our offices continues for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity. Similarly, while we have not yet experienced a major disruption in our supply chain as a result of the COVID-19 pandemic, we are experiencing significantly longer manufacturing times that, if they persist or worsen, could impact our ability to meet our customers' demand for our solutions and negatively impact our revenue. As a result of these factors we have increased our inventory levels in the near term. Moreover, if there is a significant COVID-19 outbreak that impactsSamsung Electronic Corporation's ability to manufacture our SoCs or our third-party contractors' ability to assemble, test and ship our products, we could experience delays or reductions in our ability to ship products to our customers. The pandemic may also impact our customers' ability to manufacture their products, support their customers or reduce or delay demand for their products, which could, in turn, reduce such demand for our solutions. While we cannot quantify specific impacts of the COVID-19 pandemic or actions taken by governments and businesses in response thereto, our results of operations and financial condition may be negatively affected if we encounter significant supply chain problems, reductions in demand due to our customers or end customers having problems, or other unexpected COVID-19 ramifications. Ability to Capitalize on AI and Computer Vision Trends. We expect that AI and computer vision functionality will become an increasingly important requirement in many of our current and future markets, including IP security, automotive, industrial and robotics, and certain consumer markets. As a result, we believe that our ability to develop advanced AI computer vision technology, enable and support customer product development in emerging applications, such as ADAS, advanced blind spot detection, object detection, classification and tracking, people recognition, retail analytics, and machine learning, and gain customer acceptance of our technology platform and solutions will be critical to our future success. Moreover, achieving design wins, particularly for computer vision-centric applications in the IP security, automotive, industrial and robotics markets, is vital to our ability to generate revenue growth. As such, we closely monitor design wins by customer and end market. However, a design win may not successfully materialize into revenue, and even if it does result in revenue, the amount generated by each design win can vary significantly. Ability to Develop and Introduce New or Enhanced Solutions. We operate in a dynamic environment characterized by rapidly changing technologies and technological obsolescence. To compete successfully, we must design, develop, market and sell enhanced solutions with increased levels of performance and functionality that meet the expectations of our customers. As such, we continuously invest in our research and development projects, especially AI and computer vision technologies. However, failure to anticipate or timely develop new or enhanced solutions in response to technology shifts and trends could result in decreased revenue and our competitors achieving design wins we sought. Moreover, any reliability or quality problems with our solutions could harm our reputation, increase additional development and replacement costs, and prevent us from retaining existing customers and attracting new customers. Pricing, Product Cost and Margin. Our pricing and margins depend on the volumes and features of the solutions we provide to our customers. Additionally, we make significant investments in new solutions for both cost improvements and new features that we expect to drive revenue and maintain margins. In general, solutions incorporated into more complex configurations, such as those used in high-performance camera applications or, in the future, advanced driver assistance systems, have higher prices and higher gross margins as compared to solutions sold into lower-performing, more competitive camera applications. Our average selling price can vary by market and application due to market-specific supply and demand, the maturation of products launched in previous years and the launch of new products by us or our competitors.
We continually monitor the cost of our solutions. As we rely on third-party manufacturers for the manufacture of our products, we maintain a close relationship with these suppliers to continually monitor production yields, component costs and design efficiencies.
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Shifting Consumer Preferences. Our revenue is also subject to consumer
preferences, regarding form factor and functionality, and how those preferences
impact the video and image capture electronics that we support. For example,
improved smartphone video capture capabilities led to the decline of video
cameras aimed at the video and image capture market. The current video and image
capture market is now characterized by a greater volume of more specialized
video and image capture devices that are less likely to be replaced with
smartphones, such as wearable, IP security, aerial drone and automotive cameras.
This increasing specialization of video capture devices has changed our customer
base and end markets and has impacted our revenue. In the future, we expect
further changes will continue to impact our business performance in those
markets.
Continued Concentration of Revenue by End Market. Historically, our revenue has
been significantly concentrated in a small number of end markets and we
developed technologies to provide solutions for new markets as they emerged,
such as the sports camera, IP security, aerial drone and automotive video
recorder camera markets. Since fiscal year 2018, the professional and consumer
IP security camera markets and automotive markets, including the OEM and
aftermarket video recorder market, have been our largest end markets and sales
into these markets collectively generated the majority of our revenue. We
believe, however, that continued expansion into new markets is required to
facilitate revenue growth and customer diversification. We have recently
introduced solutions to address emerging applications and markets, such as the
incorporation of AI and computer vision functionalities for AI-enabled security
cameras, AI-based driving applications and industrial and robotics markets.
While we will continue to seek to expand our end market exposure, we anticipate
that sales to a limited number of end markets will continue to account for a
significant percentage of our total revenue for the foreseeable future. Our end
market concentration may cause our financial performance to fluctuate
significantly from period to period based on the success or failure of products
that our SoCs are designed into as well as the overall growth or decline in the
video capture markets in which we compete. In addition, we derive a significant
portion of our revenue from a limited number of ODMs who build products on
behalf of a limited number of OEMs and from a limited number of OEMs to whom we
ship directly. We believe that our operating results for the foreseeable future
will continue to depend on sales to a relatively small number of customers.
Ability to Capitalize on Connectivity Trends. Mobile connected devices are
ubiquitous today and play an increasingly prominent role in consumers' lives.
The constant connectivity provided by these devices has created a demand for
connected electronic peripherals such as video and image capture devices. Our
ability to capitalize on these trends by supporting our end customers in the
development of connected peripherals that seamlessly cooperate with other
connected devices and allow consumers to distribute and share video and images
with online media platforms is critical for our success. We have added wireless
communication functionality into our solutions for wearable, IP security, aerial
drone and automotive video recorder cameras. The combination of our compression
technology with wireless connectivity enables wireless video streaming and
uploading of videos and images to the Internet. Our solutions enable IP security
camera systems to stream video content to either cloud infrastructure or
connected mobile devices, and our solutions for wearable and aerial drone
cameras allow consumers to quickly stream or upload video and images to social
media platforms.
Sales Volume. A typical design win that successfully launches into the
marketplace can generate a wide range of sales volumes for our solutions,
depending on the end market demand for our customers' products. Our ability to
accurately forecast demand can be adversely affected by a number of factors,
including the reputation of the end customer, market penetration, product
capabilities, size of the end market that the product addresses, our end
customers' ability to sell their products, miscalculations by our customers of
their inventory requirements, changes in market conditions, adverse changes in
our product order mix and fluctuating demand for our customers' products. In
certain cases, we may provide volume discounts on sales of our solutions, which
may be offset by lower manufacturing costs related to higher volumes. In
general, our customers with greater market penetration and better branding tend
to develop products that generate larger volumes over the product life cycle.
Customer Product Life Cycle. We estimate our customers' product life cycles
based on the customer, type of product and end market. We typically commence
commercial shipments from 9 to 18 months following a design win; however, in
some markets, lengthier product and development cycles are possible, depending
on the scope and nature of the project, such as in the automotive OEM market. A
portable consumer device typically has a product life cycle of 6 to 18 months,
and an IP security camera typically has a product life cycle of 12 to 24 months.
We anticipate that product development and product life cycles will typically be
longer than 24 months in the OEM automotive, Tier-1 automotive suppliers and
robotics markets, as new product introductions typically occur less frequently
in these markets.
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Results of Operations
The following table sets forth a summary of our statement of operations for the
periods indicated:
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
(dollars in thousands)
Revenue $ 92,167 $ 56,090 $ 241,627 $ 160,848
Cost of revenue 34,541 21,298 90,817 63,078
Gross profit 57,626 34,792 150,810 97,770
Operating expenses:
Research and development 41,362 36,573 118,794 103,575
Selling, general and administrative 17,475 14,468 49,323 41,348
Total operating expenses 58,837 51,041 168,117 144,923
Loss from operations (1,211 ) (16,249 ) (17,307 ) (47,153 )
Other income, net 407 673 1,218 3,231
Loss before income taxes (804 ) (15,576 ) (16,089 ) (43,922 )
Provision (benefit) for income taxes (1,560 ) 1,502 1,129 3,375
Net income (loss) $ 756 $ (17,078 ) $ (17,218 ) $ (47,297 ) The following table sets forth operating results as a percentage of revenue of each line item for the periods indicated:
Three Months Ended October 31, Nine Months Ended October 31,
2021 2020 2021 2020
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 37 38 38 39
Gross profit 63 62 62 61
Operating expenses:
Research and development 45 65 49 64
Selling, general and administrative 19 26 20 26
Total operating expenses 64 91 69 90
Loss from operations (1 ) (29 ) (7 ) (29 )
Other income, net - 1 1 2
Loss before income taxes (1 ) (28 ) (6 ) (27 )
Provision (benefit) for income taxes (2 ) 3 1 2
Net income (loss) 1 % (31 ) % (7 ) % (29 ) %
Revenue
We derive substantially all of our revenue from the sale of HD and Ultra HD
video and image processing SoC solutions to IP security camera OEMs, IP security
camera ODMs, OEM automotive or Tier-1 automotive suppliers, and consumer camera
OEMs, either directly or through our distributors. In recent years, our SoC
solutions have been primarily used in camera markets, such as IP security,
automotive video recorder, drone and wearable cameras. Although we expect these
camera markets, in particular the IP security and automotive video recorder
markets, to continue to generate revenue for the foreseeable future, we have
recently introduced new SoCs targeting emerging AI and computer vision
applications in the IP security camera, OEM automotive, industrial and robotics
markets. We derive a substantial portion of our revenue from sales made
indirectly through one of our distributors, WT Microelectronics Co., Ltd.,
formerly Wintech Microelectronics Co., Ltd. , or Wintech, and directly to one of
our ODM customers, Chicony Electronics Co., Ltd., or Chicony.
We have historically experienced seasonal fluctuations in our quarterly revenue
with our third fiscal quarter normally being the higher revenue quarter. This
fluctuation has been driven primarily by increased sales in IP security and
consumer camera markets as our customers build inventories in preparation for
the holiday shopping season. As we transition away from consumer markets,
seasonal impact has decreased. Our average selling prices fluctuate based on the
mix of our solutions sold in a period which reflects the impact of both changes
in unit sales of existing solutions as well as the introduction and sales of new
solutions. Our solutions are typically characterized by a life cycle that begins
with higher average selling prices and lower volumes, followed by broader market
adoption, higher volumes and average selling prices that are lower than initial
levels.
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-------------------------------------------------------------------------------- The end markets into which we sell our products have seen significant changes as consumer preferences have evolved in response to new technologies. As a result, the composition and timing of our revenue may differ meaningfully during periods of technology or consumer preference changes. We expect shifts in consumer use of video capture to continue to change over time, as AI and computer vision specialized use cases emerge and video capture continues to proliferate.
Cost of Revenue and Gross Margin
Cost of revenue includes the cost of materials such as wafers processed by third-party foundries, costs associated with packaging, assembly and testing, and our manufacturing support operations such as logistics, planning and quality assurance. Cost of revenue also includes indirect costs such as warranty, inventory valuation reserves and other general overhead costs. We expect that our gross margin may fluctuate from period to period as a result of changes in customer mix, average selling price, product mix and the introduction of new products by us or our competitors. In general, solutions incorporated into more complex configurations, such as those used in high-performance cameras, and in future advanced automotive OEM applications, have had or are expected to have higher prices and higher gross margins, as compared to solutions sold into the lower-performance, more competitive camera applications. As semiconductor products mature and unit volumes sold to customers increase, their average selling prices typically decline. These declines may be paired with improvements in manufacturing yields and lower wafer, packaging and test costs, which offset some of the margin reduction that could result from lower selling prices.
Research and Development
Research and development expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits. The expense also includes costs of development incurred in connection with our collaborations with our foundry vendors, costs of licensing intellectual property from third parties for product development, costs of development for software and hardware tools, cost of fabrication of mask sets for prototype products, equipment expenses, outside services and allocated depreciation and facility expenses, net of any research and development grants. All research and development costs are expensed as incurred. We expect our research and development expense to increase in absolute dollars as we continue to enhance and expand our product features and offerings and increase headcount for new SoC development and development of computer vision technology, especially for the OEM automotive market.
Selling, General and Administrative
Selling, general and administrative expense consists primarily of personnel costs, including salaries, stock-based compensation and employee benefits for our sales, marketing, finance, human resources, information technology and administrative personnel. The expense also includes professional service costs related to accounting, tax, legal services, and allocated depreciation and facility expenses. We expect our selling, general and administrative expense to increase in absolute dollars as we continue to maintain the infrastructure and expand the size of our sales and marketing organization to support our business strategy of addressing new opportunities with our computer vision technology.
Other Income, Net
Other income, net, consists primarily of interest and other income from debt security investments and cash deposits with financial institutions.
Provision for Income Taxes
We are incorporated and domiciled in theCayman Islands and also conduct business in several countries such asthe United States ,China ,Taiwan ,Hong Kong ,Italy ,Germany ,South Korea andJapan , and we are subject to taxation in those jurisdictions. Our worldwide operating income is subject to varying tax rates, and our effective tax rate is highly dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. It is also subject to fluctuation from changes in the valuation of our deferred tax assets and liabilities; tax benefits from excess stock-based compensation deductions; transfer pricing adjustments and the tax effects of nondeductible compensation. We have historically had lower effective tax rates as a substantial percentage of our operations are conducted in lower-tax jurisdictions. If our operational structure was to change in such a manner that would increase the amount of operating income subject to taxation in higher-tax jurisdictions, or if we were to commence operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could fluctuate significantly on a quarterly basis and/or be adversely affected. 28 -------------------------------------------------------------------------------- Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical provision for income taxes and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of uncertain tax position reserves and changes to reserves that are considered appropriate, as well as the related net interest and penalties. Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Comparison of the Three and Nine Months Ended
Revenue
Three Months Ended
October 31, Change Nine Months Ended October 31, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands)
Revenue $ 92,167 $ 56,090 $ 36,077 64.3 % $ 241,627 $ 160,848 $ 80,779 50.2 %
The increased revenue for the three and nine months ended October 31, 2021 , as
compared to the same periods in the prior fiscal year, was primarily
attributable to continued adoption of our CV-based solutions in the IP security
and automotive camera markets. In the professional IP security camera market,
strong growth in the Asia and North America regions, together with continued
sales penetration into the Europe region, resulted in a significant revenue
increase in this market. In the home IP security camera market, revenue growth
continued to be led by the North America region. A recovery in the automotive
OEM and aftermarket applications in the Asia region, as well as continued
adoption of our SoCs in the automotive fleet market, contributed an increase in
revenue in the automotive markets. The increased revenues from the IP security
and automotive camera markets were partially offset by decreased revenues in the
consumer camera markets.
Cost of Revenue and Gross Margin
Three Months Ended
October 31, Change Nine Months Ended October 31, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands)
Cost of revenue $ 34,541 $ 21,298 $ 13,243 62.2 % $
90,817
150,810 97,770 53,040 54.2 %
Gross margin 62.5 % 62.0 % - 0.5 % 62.4 % 60.8 % - 1.6 %
Cost of revenue increased for the three and nine months ended
Gross margin increased for the three and nine months endedOctober 31, 2021 , as compared to the same periods in the prior fiscal year, primarily due to an increase in the percentage of our total revenue that was derived from the higher gross margin automotive markets. Customer concentration shift from theChina region toAsia regions other thanChina and toNorth America in the professional IP security camera market also contributed an improvement to the gross margin for the three and nine months endedOctober 31, 2021 .
Research and Development
Three Months Ended
October 31, Change Nine Months Ended October 31, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands)
Research and
development $ 41,362 $ 36,573 $ 4,789 13.1 % $ 118,794 $ 103,575 $ 15,219 14.7 %
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-------------------------------------------------------------------------------- Research and development expense increased for the three and nine months endedOctober 31, 2021 , as compared to the same periods in the prior fiscal year, primarily due to increased personnel costs and engineering related costs. For the three and nine months endedOctober 31, 2021 , personnel costs increased by approximately$4.8 million and$13.0 million , respectively, as a result of issuance of stock awards, employee benefit programs and an increase in headcount. Our engineering headcount was 618 atOctober 31, 2021 compared to 568 atOctober 31, 2020 . Engineering related costs, including equipment expense, outside service and facility related expenses associated with the support of new SoCs and related software, increased by approximately$2.3 million and$5.5 million for the three and nine months endedOctober 31, 2021 , respectively. The increase was partially offset by decreased SoC development costs due to the timing, complexity and number of chips in development. For the three and nine months endedOctober 31, 2021 , SoC development costs decreased by approximately$2.3 million and$3.2 million , respectively.
Selling, General and Administrative
Three Months Ended
October 31, Change Nine Months Ended October 31, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands)
Selling,
general and
administrative $ 17,475 $ 14,468 $ 3,007 20.8 % $ 49,323 $ 41,348 $ 7,975 19.3 %
Selling, general and administrative expense increased for the three and nine
months ended October 31, 2021 , as compared to the same periods in the prior
fiscal year, primarily due to increased personnel costs and professional
services in support of business development in the IP security, automotive and
robotics markets. For the three and nine months ended October 31, 2021 ,
personnel costs increased by approximately $2.0 million and $8.1 million ,
respectively, as a result of issuance of stock awards, employee benefit programs
and an increase in headcount. Our selling, general and administrative headcount
increased from 178 at October 31, 2020 to 188 at October 31, 2021 . The increase
was also attributable to approximately $1.6 million of additional expense from
professional services associated with the acquisition of Oculii Corp. , for the
three and nine months ended October 31, 2021 , respectively. The increase was
partially offset by a reduction in facility related expenses of approximately
$0.5 million and $1.5 million for the three and nine months ended October 31,
2021 , respectively, caused by additional facility allocation to engineering in
support of new SoCs and related software for the automotive markets as well as
the development of computer vision-based solutions.
Other Income, Net
Nine Months Ended October
Three Months Ended October 31, Change 31, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands)
Other income, net $ 407 $ 673 $ (266 ) (39.5 )% $ 1,218 $ 3,231 $ (2,013 ) (62.3 )%
The decrease in other income, net, for the three and nine months ended October
31, 2021 , as compared to the same periods in the prior fiscal year, was
primarily due to lower yields from our debt security investments and losses from
foreign currency transactions and remeasurements, partially offset by increased
realized gains from the liquidation of our debt security investments. For the
nine months ended October 31, 2021 , the decrease was also attributable to lower
interest from our cash deposits with financial institutions.
Provision (benefit) for Income Taxes
Three Months Ended October Nine Months Ended October
31, Change 31, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands)
Provision
(benefit) for
income taxes $ (1,560 ) $ 1,502 $ (3,062 ) (203.9 ) % $ 1,129 $ 3,375 $ (2,246 ) (66.5 ) %
Effective tax
rate 194.2 % (9.6) % - 203.8 % (7.0) % (7.7) % - 0.7 %
The quarterly income taxes reflect an estimate of the corresponding fiscal
year's annual effective tax rate and include, when applicable, adjustments from
discrete tax items arising in that quarter. The Company updates its estimate of
the annual effective tax rate each quarter, and if the estimated annual tax rate
changes, a cumulative adjustment is made in that quarter. This could result in a
higher or lower effective tax rate during a particular quarter, based on the mix
and timing of actual earnings or losses versus annual projections.
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The change from an income tax provision to an income tax benefit for the three
months ended October 31, 2021 , as compared to the same period in the prior
fiscal year, was primarily due to changes in the amounts of pre-tax income,
changes to the Company's estimated annual effective tax rate, and an increase in
tax benefits from excess stock-based compensation deductions. The decrease in
income tax expense for the nine months ended October 31, 2021 , as compared to
the same period in the prior fiscal year, was primarily due to an increase in
the U.S. federal research tax credit, and an increase in tax benefits from
excess stock-based compensation deductions.
Liquidity and Capital Resources
As ofOctober 31, 2021 andJanuary 31, 2021 , we had cash, cash equivalents and marketable debt securities of approximately$457.8 million and$440.7 million , respectively. During the three months endedOctober 31, 2021 , we liquidated all of our marketable debt security investments for total cash consideration of$215.1 million in anticipation of our acquisition ofOculii Corp.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended October 31,
2021 2020
(in thousands)
Net cash provided by operating activities
18,316
Net cash provided by (used in) investing activities 190,931 (25,961 ) Net cash provided by financing activities 7,331
1,751
Net increase (decrease) in cash, cash equivalents and restricted cash$ 216,486 $
(5,894 )
Net Cash Provided by Operating Activities
Net cash provided by operating activities decreased for the nine months endedOctober 31, 2021 , as compared to the same period in the prior fiscal year, primarily due to increased inventory purchases associated with longer supply chain lead times, increased accounts receivable due to the timing of sales and decreased liabilities associated with the timing of payments to our suppliers. The decrease was partially offset by a lower net loss for the nine months endedOctober 31, 2021 .
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities increased for the nine months endedOctober 31, 2021 , as compared to net cash used in investing activities for the same period in the prior fiscal year, primarily due to an additional$165.1 million of cash receipts from sale and maturity of debt securities, as well as$56.5 million of less expenditure on investment of debt securities. The increase was partially offset by approximately$4.7 million of additional payments for tangible and intangible assets purchase.
Net Cash Provided by Financing Activities
Net cash provided by financing activities increased for the nine months endedOctober 31, 2021 , as compared to the same period in the prior fiscal year, primarily due to approximately$4.6 million of additional cash proceeds from option exercises and employee stock purchase withholding and$1.0 million of cash used for repurchasing our ordinary shares under the stock repurchase program in the prior fiscal year that did not recur in the current fiscal period.
Stock Repurchase Program
No ordinary shares were repurchased in the nine months endedOctober 31, 2021 . During the second quarter of fiscal year 2022, our Board of Directors approved an extension of the prior$50.0 million repurchase program for an additional twelve months endingJune 30, 2022 . As ofOctober 31, 2021 ,$49.0 million remained available for repurchases under the current repurchase program throughJune 30, 2022 . Repurchases under the program may be made from time-to-time through open market purchases, 10b5-1 plans or privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate us to acquire any particular amount of ordinary shares, and it may be suspended at any time at the company's discretion. Repurchases are funded using working capital and any repurchased shares are recorded as authorized but unissued shares. 31
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Operating and Capital Expenditure Requirements
As ofOctober 31, 2021 , we had cash and cash equivalents of approximately$457.8 million . OnNovember 5, 2021 , we completed our acquisition ofOculii Corp. , for$307.5 million in cash. We believe that our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities, and implement and enhance our information technology platforms. As we expand our operations, we may require more working capital. If our available cash balances are insufficient to satisfy our future liquidity requirements, we may seek to sell equity or convertible debt securities or borrow funds commercially. The sale of equity and convertible debt securities may result in dilution to our shareholders, and those securities may have rights senior to those of our ordinary shares. If we raise additional funds through the issuance of convertible debt securities or borrowing funds commercially, we may become subject to covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available to us on reasonable terms, or at all.
Our short- term and long-term capital requirements will depend on many factors, including the following:
• our ability to generate cash from operations; • our ability to control our costs;
• the expansion of our research and development of new technologies and
products to address new markets and applications;
• the magnitude and duration of COVID-19 impact;
• the emergence of competing or complementary technologies or products;
• the costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights or participating in
litigation-related activities; and
• our acquisition of complementary businesses, products and technologies.
Contractual Obligations, Commitments and Contingencies
Manufacturing Purchase Obligations
As of
Except as described above with respect to the manufacturing purchase obligations, there were no other material changes in our contractual obligations, commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 . Please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations, Commitments and Contingencies" in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 for a description of our contractual obligations.
Off-Balance Sheet Arrangements
As ofOctober 31, 2021 , we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
Recent Authoritative Accounting Guidance
See Note 1 of Notes to Condensed Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Critical Accounting Policies and Significant Management Estimates
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the 2021 fiscal year filed with
the
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