Ambarella (AMBA) Q1 2024 Earnings Call Transcript

Ambarella (AMBA 0.49%)
Q1 2024 Earnings Call
May 30, 2023, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to Ambarella's first quarter fiscal year 2024 earnings conference call. [Operator instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Mr.

Louis Gerhardy, vice president, corporate development. Please go ahead, sir.

Louis Gerhardy -- Vice President, Corporate Development

Thank you, Jonathan. Good afternoon and thank you for joining our first quarter fiscal year 2024 financial results conference call. On the call with me today is Dr. Fermi Wang, president and CEO; and Brian White, CFO.

The primary purpose of today's call is to provide you with information regarding the results for our first quarter of fiscal year 2024. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements.

We're under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we filed with the SEC, including the annual report on Form 10-K we filed on March 31, 2023, for fiscal year 2023, ending January 31, 2023. Access to our first quarter fiscal 2024 results press release, transcripts, historical results, SEC filings, and a replay of today's call can be found on the investor relations page of our website. Fermi will first provide a business update for the quarter.

Brian will review the financial results and outlook. And then we'll be available for your questions. Fermi.

Fermi Wang -- President and Chief Executive Officer

Thank you, Louis, and good afternoon. Thank you for joining our call today. Our Q1 results were slightly ahead of expectations. Despite the significant headwinds from the ongoing semiconductor industry cyclical downturn, we are not allowing this difficult environment to distract us from further developing our AI business.

Before I talk about the details of the quarter, with all the cross currents in the market, together with all the exciting developments in the AI market, I thought this would be a good time to review our strategic vision. Simply put, our transformation into an AI company is well underway, with AI already representing 45% of our total revenue last year and an estimated 60% this year. Now, with our CV3 platform, we are expanding into a new phase of AI market development. The AI market is at a very early stage.

It is also dynamic, with many technologies and applications emerging. With all the excitement about AI, the key to our continued success will be our focus and the degree to which we can leverage our unique core competencies. Even with our focus, our current serviceable available market, or SAM, is sizable, exceeding $4 billion this year and approaching 10 billion in fiscal year 2028. So, what are we focused on? Ambarella is focused on deep learning AI processors and the software, which are replacing the legacy and the less powerful traditional machine learning approaches.

Within the deep learning market, the AI processor market has been dominated by training processors used in servers typically for the cloud, data center, or enterprise. Our focus is on AI inference, which is where AI models get deployed and are practically utilized by end users. As the AI market begins to mature, most third-party research firm forecasts the size of inference AI to surpass training AI. We have already demonstrated how we can leverage our rich heritage in human perception, also known as video processors, into AI.

Our CV2 family was our first move into AI, and it targets inference AI perception processing, as with the edge, where cameras are the principal sensing modality. We continue to expect the CV2 family to be approximately 60% of total revenue in fiscal year '24 and represent a material portion of our operating profit dollars. The CV2 SoCs integrates our camera perception and expertise with our proprietary second-generation CVflow AI architecture. The incremental processing to enable AI causes our CV2 blended average selling price, ASP, to be greater than two times our video processor.

This contributed to an over 20% increase in our firmwide ASP in fiscal year '23. This year, the CV2 family is expected to become the dominant driver of our revenue and remain a key driver for several years. The solid stream of operating profit from video processors and the CV2 family of edge AI processors is now being reinvested into the significantly more powerful CV3 platform, targeting mobility applications. The CV3 platform builds upon our CV2 family experiences and utilize our proprietary third-generation AI inference processor.

For the typical Level 2+ application, the CV3 SoC provides the perception processing for all the camera and the radar sensors, as well as the processing required in the fusion and the planning layers. The significant amount of incremental processing expected to facilitate a CV3 SoC ASP to be five to 20 times higher than a CV2 SoC. It is also very important to understand, CV3 is a platform, as the SoC in the CV3 family can capture incremental value by running our own autonomous driving, AD, software stack IP and/or radar perception software IP. We aim to bundle this software IP with our CV3 SoCs in a platform approach, providing our customers with the flexibility to pick and choose exactly what they need.

Regarding our autonomous mobility partnerships with Continental, I am pleased to share that we extended our partnership to a Level 4 system development and confirmed the first business award of our jointly developed stack as a complete Level 4 fallback system. The system will be supplied to Continental for customers in the commercial vehicle industry. To be clear, the CV3 platform is a major leap forward in terms of our value proposition, and it brings a new list of target customers, automotive OEMs. We are still in the early stage of building out the CV3 SoC portfolio and developing the market.

However, we are not doing this alone, with leading Tier 1s like Bosch and Continental porting their software to CV3, validating our superior efficiency, jointly marketing to auto OEMs, using their scale and are bringing more credibility to our CV3 market development efforts. Additionally, for the AI server inference market, we have already evaluated running large language model, LLM, on CV3-AD High, which has been sampled for nine months, and we believe the LLM performance on this existing SoC to be as good as NVIDIA A100 with much lower power consumption and superior total system cost. We are now establishing our software development effort, as well as a business development program to engage with customers. Turning to new products and customer engagement in this quarter.

In March, at the ISC West security show, we announced our CV72S for mainstream enterprise and public class security cameras. CV72 utilized a third-generation CVflow deep learning AI accelerator architecture utilized in the CV3 SoCs. These CV3 derivative SoCs bring to the IoT market the highest AI performance per watt, the fusion of radar and camera data, and it includes support for the latest transformer neural networks. Furthermore, CV2S offers six times the AI performance of CV2 family, enabling it to run Ambarella's groundbreaking neural network-based image signal processing software for 4K color, night vision, and HDR, with plenty of headroom for additional concurrent neural networks.

CV72S is now sampling to leading IoT camera companies. In IoT, there were a number of new enterprise and the public security camera introduced, including Motorola, who introduced the H6SL camera line based on CV25, as well as the V700 body camera based on our S6LM SoC. And Verkada introduced its TD52 video intercom, featuring five-megapixel camera based on our CV25. iPRO, formerly Panasonic and Japan's largest security camera supplier, introduced multiple new product families based on our CV2, CV22, and CV25, including dual and quad multi-imager models.

And the European market leader Axis, part of Canon, introduced its 3905 rugged dome models designed for surveillance on board vehicles such as buses based on our S6LM. Also in Europe, Dallmeier introduced Domera E series camera, which use our CV22 AI SoCs to enable imaging in total darkness, utilizing adaptive IR illumination. In a home monitor scenes -- in the home monitoring market, Alarm.com introduced its ADC-780 battery-powered doorbell based on our S5LM. I will now talk about the progress in the automotive market.

As mentioned earlier, our new CV72S SoC is an important CV3 derivative for IoT market. However, it is expected to also be an important derivative product for the automotive market. And in April, at the Shanghai Auto Show, we announced and demonstrated CV72AQ. This SoC targets multiple automotive applications, including Level 2+ and other applications with up to six cameras and five radars running on the same SoC.

CV72AQ demonstrations at the show included an ADAS plus parking system, with a five-camera configuration, including an eight-megapixel front camera and the multiple three-megapixel fisheye camera running YOLO v7 neural networks on each camera. We also demonstrated, versus a leading GPU solution, superior performance and lower power consumption of CV72AQ running transformer networks. We received very positive feedback on CV72AQ from Tier 1s and OEM in China. Also, at the Shanghai Auto Show, a number of other Tier 1s demonstrated CV3-based systems.

This included Continental, which showed a 10-camera live demo, with multiple neural networks running on each video stream. And Hyperview demonstrated its GT-HyperMax platform, featuring a sensor suite of 11 cameras, plus one lidar, and the three radar in a car, providing City Navigate-on-Pilot advanced functions and leveraging the latest transformer network. In China -- in March, China's GAC introduced its electric AION Y Younger L2+ ADAS SUV with an intelligent 1V1R driving assistance system based on our CV22AQ AI SoC. And in April, Geely Zeekr introduced its Zeekr X electric SUV with a face recognition access control system based on CV28AX AI SoC.

In summary, a majority of our new customer engagement activity continue to be our AI products. AI is expected to be a majority of our revenue for the first time in fiscal year 2024, and AI should continue to grow as a proportion of our mix. To bring our AI strategic vision together, first with CV2, and now, again, with the even more significant CV3 platform, we have leveraged our core competencies, cumulative knowledge, and unique approach to establish a strong presence in the AI deep learning domain. Our investment yield differentiated products that are very different -- very efficient and on open platforms that are scalable and flexible.

The CV2 family is already very profitable, and we are well into the development phase with the CV3 platform. In summary, there is still a lot of work left to execute to our strategy, and that the ongoing semiconductor industry cyclical downturn pressure our near-term financials. However, we are confident in the long-term secular growth opportunity for edge inference AI. We do not intend to stray from our strategic vision, and we are continuing to invest in our differentiated AI strategy.

I will now turn it over to Brian to discuss the Q1 result and the Q2 outlook in more detail.

Brian White -- Chief Financial Officer

Thanks, Fermi. I'll review the financial highlights for the first quarter of fiscal year 2024. I'll also provide a financial outlook for our second quarter ending July 31, 2023. I'll be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results.

For non-GAAP reporting, we have eliminated stock-based compensation expense and acquisition-related costs adjusted for the impact of taxes. For fiscal Q1, revenue was 62.1 million, in line with the midpoint of our prior guidance range, down 25% from the prior quarter and down 31% year over year. As expected, total automotive revenue was approximately flat sequentially, while IoT revenue was down sharply, driven by customer inventory reduction actions. Non-GAAP gross margin for fiscal Q1 was 63.1%, in line with the midpoint of our prior guidance range of 62% to 64%.

Non-GAAP operating expense for the first quarter was 46.2 million, up $200,000 from the prior quarter and below our prior guidance range of 47 million to 49 million. The lower operating expense was driven by continued expense management and the timing of spending between quarters. We remain on track to our internal product development milestones. Q1 net interest and other income was 1.3 million.

This was higher than our original forecast, driven by a higher cash balance and returns on cash invested. Our non-GAAP tax provision was 300,000 or minus 5.5% of pre-tax income. This was slightly lower than our original forecast, driven by the mix of pre-tax income across tax jurisdictions. We reported a non-GAAP net loss of $6 million or $0.15 loss per diluted share.

Now, I'll turn to our balance sheet and cash flow. Fiscal Q1 cash and marketable securities increased 20.5 million to 227.4 million. DSO improved significantly, from 57 days to 43 days, as the timing of shipments throughout the quarter normalized after being back-end loaded in the prior quarter. Ending inventory increased slightly, up 1.8%.

However, days of inventory increased more significantly, from 116 to 151, due to the sequential reduction in cost of goods sold on lower revenue. Cash from operations was strong at 22 million, driven by the decrease in accounts receivable. And capital expenditures for tangible and intangible assets were 2.3 million. Free cash flow, defined as cash from operations less capex, was 31.7% of revenue for the quarter and 6.4% on a trailing 12-month basis.

We had two logistics and ODM companies represent 10% or more of our revenue in Q1. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 49% of revenue. Chicony, an ODM who manufactures for multiple IoT customers, was 16% of revenue. I'll now discuss the outlook for the second quarter of fiscal year 2024.

Customer feedback on end demand remains generally healthy. However, at the same time, customers also continue to aggressively manage down their inventory levels. Considering these factors, we estimate that our fiscal Q2 revenue will be flat to Q1 and in the same range of 60 million to 64 million that we guided for the prior quarter. By end market, we expect that both automotive and IoT revenue will be approximately flat sequentially as well.

We expect non-GAAP gross margin to be in the range of 62.5% to 64.5%, up slightly from Q1. We expect non-GAAP opex in the second quarter to be in the range of 48 million to 50 million, with the increase compared to Q1 driven by higher R&D tied to new product development activities. We estimate net interest income to be approximately $1 million, our non-GAAP tax expense to be approximately 700,000, and our diluted share count to be approximately 39.7 million shares. Ambarella will be participating in TD Cowen's Technology, Media, and Telecom Conference on May 31st and June 1st, Bank of America's Global Technology Conference on June 6th, and Rosenblatt's Age of AI Conference on June 7th.

Please contact us for more details. Thank you for joining our call today. And with that, I'll turn the call over to the operator for questions.

Questions & Answers:

Operator

Certainly. [Operator instructions] And our first question comes from the line of Gary Mobley from Wells Fargo. Your question, please.

Gary Mobley -- Wells Fargo Securities -- Analyst

Hey, guys. Thanks for taking my question. I wanted to ask about inventory drawdown with customers. You mentioned that customer and demand appears to be healthy, but obviously, you're undershipping end demand.

Could you give us a sense of by how much and by how much or how close we are to inventories getting back down to a normal level? And then maybe you can comment as well specific to China-related demand.

Fermi Wang -- President and Chief Executive Officer

Yeah. This is Fermi. I think like Brian said, you know, the -- we haven't seen a huge change from the customer side. For example, last quarter, we talked about customer that has healthy growth based on our silicon, but our silicon revenue from that is down, you know, 15%, 20% year over year.

And that situation continues. And I think the customer continue to confirm that there are growth and that we continue to forecast lower revenue this year. So, I think from that point of view, I think the situation is very similar to last quarter, and we have not seen anything -- any indication that this inventory correction will end. So, I think what we are looking for is really that the ramping up of new orders consistently from different customers, that will probably give us an indication that it's recovered.

We haven't seen that yet.

Gary Mobley -- Wells Fargo Securities -- Analyst

And as my follow-up, I wanted to ask about your win that you captured in conjunction with Continental. Is that an automotive-grade win? And maybe you can give us a sense of where automotive -- other automotive-grade wins may stand.

Fermi Wang -- President and Chief Executive Officer

Right. So, that's an automotive-grade win. And like I said, it's a Level 4 car, and it's going to be auto-grade chip, and it's going to be -- it's first design that we work with after we announced and we're working with Continental. And in this design win, it involves not only our CV3 SoC, but also our software IP, the software stack that we -- Conti and us are co-developing.

So, I think it's a combination of software and the SoC win. We do -- we are working on other design wins. We -- for example, we talk about, first of all, we'll continue to work with Tier 1 like Conti and Bosch on any potential design wins. At the same time, we also mentioned that in China, I think we start seeing that a lot of opportunity in Level 2+ cars.

And especially at the Shanghai Auto Show, we introduced CV72AQ. It makes us believe that we have plenty of opportunity there, and we are optimistic that we're going to close our design win this year there. And also, the time to revenue is much faster with those potential design wins in China.

Gary Mobley -- Wells Fargo Securities -- Analyst

Thanks, Fermi.

Operator

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

Ross Seymore -- Deutsche Bank -- Analyst

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

Fermi Wang -- President and Chief Executive Officer

Right. So, first of all, I think that we are now waiting for new product to kick in. We believe that the current inventory correction, when they finish, the existing product line will come back to life and they will go back to original level. So, we are not counting on new product design win to fix this inventory correction problem.

And for your first question, in terms of level, last quarter, when we look at just one example of a customer, we think that we are probably like a 25%, 30% below the realistic level. So, I think we still believe that's the level, the differences we are looking at. And hopefully, when the inventory correction finished and all the customers went back to normal, I think that should give you an indication where we think the normal level of revenue is.

Ross Seymore -- Deutsche Bank -- Analyst

Got it. And I guess for my follow-up on the automotive side specifically, it's good to see the design win with Conti turn into products, etc. That business has been basically flat sequentially, I think, for four quarters now, three quarters of reported, and it looks like you're guiding it relatively flat. When's the timing where we should start to see that business picking up? You guys have talked about this investment.

I know it's a longer-term strategy for the company. But it seems like one that should yield some pretty strong tailwinds off the size company you're currently running at. So, just wondered on the timing that we should look for and what the drivers of that growth should be.

Fermi Wang -- President and Chief Executive Officer

Well, I definitely think that it's flat if you look at the few quarter before the inventory correction, and now you're comparing to the inventory correction here. So, I think the last two quarters definitely been impacted by inventory correction in the automotive section. So, I also believe that as soon as the inventory correction finish, which auto should show some revenue growth from that point of view. But like you said, the really big auto growth should come with, you know, the ADAS market and also Level 2+ market when that go into production.

Ross Seymore -- Deutsche Bank -- Analyst

Great. Thank you.

Operator

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

Tristan Gerra -- Robert W. Baird and Company -- Analyst

Hi. Good afternoon. Just wanted to have a follow-up on the inventory correction and also try to tie this with market share shift. So, it's no secret that some Chinese companies have tried to diversify away from U.S.

supply, either because there is a push from that -- for that from the Chinese government or because they're concerned about potential future sanctions. And I know you've very much de-risked your surveillance camera exposure to China in the past, but you still have exposure in automotive. So, I wanted to know if there is any signs that perhaps the ramp in China is not expected at the pace that you thought will happen a year ago. Are you getting any feedback? And also, just to the extent that the inventory correction that you're describing seems to be a bit more pronounced than some of the other companies where it's been really more smartphone and PC-centric for other companies.

So, any elaboration around that would be great.

Fermi Wang -- President and Chief Executive Officer

Right. So, in terms of the geopolitical situation, I think for the automotive market, it's much less severe than a security, right? Security is really being viewed as, you know, the safety of the country. So, that's why I think people trying to avoid U.S. components.

But in automotive, in fact, if you look at the middle and high-end auto components in Chinese market today, all of them are U.S. components. So, I think that's because, in automotive processing, I think that our solution, among other U.S. components, still have better performance efficiency, and we haven't seen a similar impact from the Chinese government on mandating the Chinese automotive OEM use exclusively the Chinese component.

So, I think that's the two things add together. I think I still believe that we won't see a severe downturn on the Chinese automotive business.

Tristan Gerra -- Robert W. Baird and Company -- Analyst

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

Fermi Wang -- President and Chief Executive Officer

Right. So, I think the -- from the product road map point of view, I think for Level 2+, Level 3 car, I think we have all the contents that we need to go after this market. Of course, from the hardware and software point of view, I think we can offer a complete solution. But from the strategy point of view, as we said before, we are not bundling hardware and software together.

We are trying to offer a software platform that customer can pick and choose and that we can help our customers to build their own software stack. And working with Conti is probably the best example. And in terms of scale, it's always a problem, right? Trying to compete with a bigger company is always a disadvantage for us. But I think that's the reason we continue to try to work with bigger Tier 1s and using -- with their scale and with their expertise, that will help us partially further to address this problem.

Tristan Gerra -- Robert W. Baird and Company -- Analyst

Great. And clearly, the Conti and Bosch design win speak to that effect. Thank you very much. Very useful.

Fermi Wang -- President and Chief Executive Officer

Thank you.

Operator

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

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Yes. Thank you. My first question, Fermi, could you just talk a little bit about the main difference between the CV3-AD and the CV3 AQ? You know, whether it's functionality or ASPs or any other color you can share with us.

Fermi Wang -- President and Chief Executive Officer

Right. So, CV3-AD and CV72AQ. First of all, they are all based on the same architecture, CV3 architecture. All of them using the third generation of AI inference AI processor.

The difference -- the main difference is that CV3-AD is designed for the auto-grade chip level ASIL and CV72AQ is designed for the system level auto-grade. So, I think that's the main difference. So, I think the -- for example, CV72AQ platform is targeted for Chinese market, where -- that people are willing to accept system-level ASIL system versus a chip-level ASIL system. That's the main difference.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Very good. Thanks for clarifying that. And my follow-up question, you announced the design win for the software IP modules. Again, I was just hoping you could elaborate a little bit more on that.

And, you know, that -- it's surprising to me when I hear software IP module, right? Because I think hardware and software. So, like how exactly is the accounting for this particular design?

Fermi Wang -- President and Chief Executive Officer

So, when we -- I think I see as we announced this software partner with Conti. So, basically, the idea is that we are contributing a portion of software solution and we work with the Conti software team to integrate those modules into a complete software stack, leveraging the strengths of both sides. For example, Ambarella is more -- its strength is on the perception side. Particularly, today, it's video perception and radar perception.

But Conti definitely has a lot more system-level solutions and famous for their, you know, auto-grade system software. So, I think that's where we see that we can leverage both sides of our strength and build a software stack based on, you know, leveraging the both side's strength. So, I think that's an approach that we're different than the customer. And also, for OEMs, that if they are anybody who wants to do a similar business model, we are open to that, too.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

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

Fermi Wang -- President and Chief Executive Officer

No, it's a --

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Part of -- yeah.

Fermi Wang -- President and Chief Executive Officer

Oh, I see. That's a -- that's basically software revenue split. We need to decide how to share the software revenue together.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Understood. All right. Thank you very much.

Operator

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

Kevin Cassidy -- Rosenblatt Securities -- Analyst

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

Fermi Wang -- President and Chief Executive Officer

Right. So, obviously, you know, the similarity between our current automotive market and the new AI server market is they are really running a neural network on our chip. So, from tools point of view, that we already develop many, many software tools to help our customer to port a neural network onto our chip. But obviously, LLM is a different beast because they are much larger than the typical neural network that we are working with.

So, definitely, there is an optimization cycle we need to work on. But the reason we decide and we think we have a great opportunity here is, first of all, we have a working silicon kit demo. Two, we have a bunch of expertise and the software tools available that we build for other market. Three, we just need to fine-tune and optimize the current software for this LLM to achieve the best possible performance that we can get.

So, I think from that point of view, the effort for us is well -- is limited. And also, I think that we also believe that, in the market, very few people can claim what I just said, that, you know, we have a working silicon, can show a real performance and real low power consumption, and also demo to the customer. So, I think that's our advantage and also believe that the extra resource we need to put on is something that we can handle.

Kevin Cassidy -- Rosenblatt Securities -- Analyst

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

Fermi Wang -- President and Chief Executive Officer

No. I think we have to be focused. I think we need to identify the sweet spot. I think -- you know, we should talk about strategy later because we have -- we are in the process of talking to customers.

But I think we need to focus on where our strength is and also focusing on companies that has -- can leverage our chip and our software immediately. And so, I think that one thing we learned is, you know, to work with a customer who has really the -- they feel the most painful experience with current solutions who are most likely to work with us. And that's where we're going to focus on.

Kevin Cassidy -- Rosenblatt Securities -- Analyst

OK. Great. Very interesting.

Operator

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

Quinn Bolton -- Needham and Company -- Analyst

Hey, guys. Thank you for taking my question. I guess, Fermi and Brian, maybe just your best guess -- I mean, we've been working down this inventory now for a few quarters. Certainly, it doesn't sound like it's -- you haven't seen any green shoots yet in terms of the orders.

What's your best guess as to how many more quarters do you think it will take to work down this inventory? Do you think it will be pretty clear by the end of your fiscal year or the end of the calendar year? Do you think it could take longer?

Brian White -- Chief Financial Officer

Yeah. Quinn, this is Brian. A quarter ago, we said that, you know, our guidance for fiscal Q1, which was 62 million at the midpoint, we thought that that would represent, you know, the bottom as it related to impacts associated with inventory adjustments and that it would likely not get worse from that point. And we're kind of sitting in the same place we were 90 days ago from the standpoint that we still believe that's the case.

What becomes challenging is forecasting, you know, when this thing lifts off again and at what slope. We certainly have visibility to backlog, but that backlog has been shifting, right? We've had reschedules, cancellations that we've had to deal with. So, while in normal times we could look at that backlog and have a lot of confidence as to how revenue might shape up, say, in fiscal Q3, because of the movements that we've seen, our confidence in providing a forecast would be lower in this cycle than kind of a normal time. So, we don't see it getting worse.

But the visibility to the second half and just how that recovery plays out, I think it's hard for us to talk to at this point.

Quinn Bolton -- Needham and Company -- Analyst

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

Brian White -- Chief Financial Officer

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

Quinn Bolton -- Needham and Company -- Analyst

Got it. Understood. Thank you, Brian. And then I guess for Fermi, I guess I was a little surprised to see your first win with Continental being a Level 4 win.

I think the initial partnership you had announced, you know, back late last year, I think was for Level 2+. And so, can you just sort of maybe talk about how the Level 4 win came together? I know you expanded the relationship at CES. And so, maybe that was on the fast track. But when -- were you surprised that the Level 4 came before Level 2+ with Continental?

Fermi Wang -- President and Chief Executive Officer

Well, I think that the engagement definitely after we announced this software collaboration between Conti and us, which will happen at CES. And things go really fast after that. So, I think, definitely, I'm also surprised at how fast this developed. And also -- and I need to thank Conti that putting this whole thing together because the one important thing is that to sell that joint software stack and to get the confidence with the customer is important for us.

And I think that's a great win for us. But at the same time, I want to say again, on the Level 2+, I think that with the -- you know, we look at two things, one is the momentum with Conti and the Bosch is still -- that we're still working on and are still there. But more importantly, I really think now with the Shanghai Auto Show and with our CV72AQ announcement and the sampling the component and the software to a customer recently, that gave us confidence that we're going to see CV72AQ Level 2+ design win this year and maybe quick revenue returns. And in China, you know that the design cycle is not four years.

Usually, it's less than two years. So, we are hopeful to see a really quick revenue return from the CV72AQ. And also, that we have a road map to continue to address this market. So, I think -- overall, I think Level 2+ design win is -- will continue to be our focus, and we think we'll continue to deliver what we think that we can do.

Quinn Bolton -- Needham and Company -- Analyst

Perfect. Thank you, Fermi.

Operator

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

Brian Ruttenbur -- Imperial Capital -- Analyst

Yes. Thank you. Can you give me, first of all, housekeeping D&A and material depreciation and amortization?

Brian White -- Chief Financial Officer

Depreciation and amortization, is that the question?

Brian Ruttenbur -- Imperial Capital -- Analyst

Yes. That's affirmative.

Brian White -- Chief Financial Officer

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

Brian Ruttenbur -- Imperial Capital -- Analyst

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

Or do you anticipate DSOs continuing to go down?

Brian White -- Chief Financial Officer

No. I mean, what we saw in fiscal Q1 was a normalization of the timing of shipments throughout the quarter versus, say, fiscal Q4, where shipments were very back-end loaded. So, we had a couple of quarters. Fiscals Q3 and Q4 were both very back-end-loaded quarters.

Q1 normalized, DSOs came down. That provided about a $22 million benefit to cash flow in the quarter. As we move forward, we would expect DSOs to remain at similar levels. Thus, we would not expect to get a large benefit in a future quarter from another stair step down, for example.

So, as we move into Q2, you know, obviously, the revenue level and the other metrics that we gave you, that would be a forecast for a non-GAAP loss. And so, you'll have lower free cash flow in fiscal Q2 versus Q1. And as we go through the year, cash flow is just going to be highly dependent upon the revenue levels. And we've talked about the fact that we just -- we don't have great visibility at this point in time to the second half revenue.

Brian Ruttenbur -- Imperial Capital -- Analyst

Great. Thank you very much.

Operator

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

Suji Desilva -- ROTH Capital Partners -- Analyst

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

Fermi Wang -- President and Chief Executive Officer

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

Suji Desilva -- ROTH Capital Partners -- Analyst

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

Fermi Wang -- President and Chief Executive Officer

I think that comment is purely for silicon, not -- does not include software. So, the difference is really from the low end to the high end. So, for example, the lower end -- for the high-end chip, we talk about, you know, $400 -- 400-plus dollars. And the lower end, for example, our 655 chip that we're talking about is probably in the $100 range.

So, it's really that level of the different performance price range that we're talking about. I also believe that for automotive road map, you need to have a family of chip to address different performance level, for Level 4, Level 3, Level 2+. Even multiple layers Level 2+ require different chips. So, I think that's where I say we're talking about.

Suji Desilva -- ROTH Capital Partners -- Analyst

OK. Thanks, Fermi.

Operator

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

David O'Connor -- Exane BNP Paribas -- Analyst

Great. Good afternoon. Thanks for taking my questions, guys. Maybe, Fermi, just going back to the question on the AI inference opportunity, can you just give us a bit more detail there on what type of customers are potentially kind of you could engage with on the AI inference side? Is that data pros or enterprise or any particular vertical that you think may be open to you? And I know it's early days, but as you mentioned, you have a working chip and you need to rework the software.

But what kind of time frame do you think you could potentially get to revenue there? Is that kind of three to five years out? Is it kind of before that? And anything around kind of content opportunity there would be helpful. Thank you.

Fermi Wang -- President and Chief Executive Officer

Yeah. So, it's a lot of questions. So, I think, like I said, the target market is really where -- you know, is -- I'll -- I think our first target is really on the edge server side, which where you can focus on, you know, the enterprise and the people who are running their own neural network. You know, for people running OpenAI or other very large model, that might not be the best customer at this point for us.

But there are plenty of other different software ISVs and then that use -- driving different neural net model, either for their own code or they are running the -- at the enterprise level. Those are the probably sweet spot for our chip because we know that -- just like I said, the scale is -- definitely matters in this market, too, and we need to pick the best market to go after. And we are still in the process to figure that out. But I definitely think that's -- what I just say is our current thinking.

But I think in terms of, you know, the content, I think, it's obviously even better than our automotive ASPs because the competition out there is starting at a much higher level. And also, we have a great advantage on both -- on the power consumption side. We're not talking about 5%, 10%. We're talking about a significant difference in term of power consumption.

So, therefore, as well as the total system costs. So, I think from that point of view, it will help us to get healthier content there. I think there's another question I forgot.

Brian White -- Chief Financial Officer

Time to revenue.

Fermi Wang -- President and Chief Executive Officer

Time to revenue. So, you know, we -- I think we need to get a demo running then software tool running so the customer can port, and then we can talk about design win, then we'll talk about revenue. So, I think if you ask me today, I will say that's a 24 months process totally. That's a wild guess --

David O'Connor -- Exane BNP Paribas -- Analyst

OK. Very helful.

Fermi Wang -- President and Chief Executive Officer

Yeah.

David O'Connor -- Exane BNP Paribas -- Analyst

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

Fermi Wang -- President and Chief Executive Officer

Yeah. Our plan is to use our current expertise and team to facilitate this activity. The idea is simple because we have -- our internal team is -- has, you know, helping many other customers to port their neural network onto CV3. And we understand because it's so large and it takes an extra effort.

So, that the best way to do this is fund it and put an internal resource on this project. Obviously, that -- you will take a trade-off, right? We don't plan to add much of the resource into the company. So, I think that we need to really focus on the area where we think it's important. I think where it's important for us is definitely security camera to provide cash for us, maintaining our CV3 momentum with the current design wins like a Bosch and Conti, and try to secure CV3 design with OEMs, and also try to find the resource to fund this LLM.

And everything else is a trade-off that we need to consider.

David O'Connor -- Exane BNP Paribas -- Analyst

Very helpful. Thank you.

Operator

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

Blake Friedman -- Bank of America Merrill Lynch -- Analyst

Hi. This is Blake Friedman on for Vivek. Thanks for taking my question. Just first, on the cash side.

Just curious, I know you mentioned talking about increased R&D investments over the next few quarters. Just with at your current cash level, are you comfortable there or do you see any needs to raise incremental cash in the future?

Brian White -- Chief Financial Officer

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

So, no need to raise additional cash.

Blake Friedman -- Bank of America Merrill Lynch -- Analyst

Great. And then quickly, as my follow-on, just given the current revenue levels, we've seen a relatively substantial [Audio gap] change with kind of, you know, split between IoT and auto is now roughly 65, 35%. Gross margins have still kind of held up relatively OK. And above this, the long-term range of 59% to 62%.

So, just kind of curious if you can give us the puts and takes onto the gross margin side and maybe beyond 2Q about [Inaudible] level?

Brian White -- Chief Financial Officer

Yeah. I think we'd stick with that long-term model that we provide -- provided previously. In, you know, recent history, we've been delivering higher gross margins than that. And we would expect that that would continue until we get into the impacts of potentially very large automotive opportunities.

And that's why that long-term model provides for a slightly lower gross margin if we need to get there to secure those design wins. But for now and the foreseeable future, we should be at recent gross margin levels and probably a little bit higher once we get through this inventory correction and get back to slightly higher gross margins that we were posting last fiscal year.

Blake Friedman -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

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

Martin Yang -- Oppenheimer and Company -- Analyst

Hi. Thank you for taking my question. Question [Technical difficulty] on CV72AQ. [Technical difficulty]

Fermi Wang -- President and Chief Executive Officer

I'm sorry. Cannot hear you well.

Martin Yang -- Oppenheimer and Company -- Analyst

Can you hear me better now?

Fermi Wang -- President and Chief Executive Officer

Yes. Yes.

Martin Yang -- Oppenheimer and Company -- Analyst

[Inaudible] do you expect most customers either automotive [Technical difficulty]

Louis Gerhardy -- Vice President, Corporate Development

Hey, Jonathan, let's go to the next question, and then we'll give Martin another chance and -- after this question.

Operator

OK. Understood. One moment for our next question. And our next question comes from the line of Matt Ramsay from TD Cowen.

Your question, please.

Joshua Buchalter -- Cowen and Company -- Analyst

Hi. This is Josh Buchalter on behalf of Matt. Thanks for squeezing me in. It was great to see that the CV3 win with Continental for commercial applications.

I was wondering if you could provide some initial feedback on how it's going on the consumer passenger vehicle side. I recognize it's only been a few months since the partnerships have been announced, but you're going against some entrenched and large competitors in the central ADAS domain. And I was wondering how Conti and Bosch are positioning your CV3-based solutions to win in that market. Thank you.

Fermi Wang -- President and Chief Executive Officer

Yeah. I think, you know, first of all, you know, we have a strong relationship with both Bosch and Conti. And Conti has even further up collaboration because of software relationship. And you can see that software relationship already start paying off, not only on the Level 4, but also we start building our engineers in collaboration on that.

So, I think that activity definitely is very helpful. And also, on the business development side, both sides are, you know, working with the Conti and Bosch definitely helped us to address the scale problem partially. And also, we believe that working with -- we continue to believe that working with Conti and Bosch and -- is the right thing for us to do to get design wins in the U.S. and Europe.

I think that said, I also believe that our first Level 2+ design will come from China, like I said, because the momentum we see after the Shanghai Auto Show is real and that we not only demo a powerful chip but also we demo something that very few people can do, which is running transformer neural network in a lower-end chip that just nobody out there can demo like the company you've mentioned, none of them in the lower-end chip can demo transformer efficiently. And the transformer becomes such an important neural network and is being used as a benchmark everywhere. So, particularly in China, where AI is -- AI in neural network performance is very much appreciated. So, I think that's a momentum where we definitely enjoy it, and I think -- I hope that we can get several design wins in China this year.

Joshua Buchalter -- Cowen and Company -- Analyst

Appreciate the color. That's actually a nice segue to my follow-up. Can you talk about -- I think this is the first time you've mentioned auto being a source of inventory correction despite the results coming in in line with your expectations. Did that get any appreciably worse during the quarter? I know we've all heard about weakness in the China EV market.

It'd be helpful if you could help us understand your exposure there and if that worsened and drove, I guess, some incremental weakness during the quarter. Thank you.

Fermi Wang -- President and Chief Executive Officer

No. What we said before is we think our inventory control in auto is much less than inventory control in IoT. That's what we said. We didn't say auto was not impacted.

We definitely see a few several customers got impacted, but not as bad as IoT cloud -- IoT space. So, from that point of view, I think we still think that -- I still expect that when the inventory correction finished, the auto should go back to a growth.

Joshua Buchalter -- Cowen and Company -- Analyst

Got it. Thank you.

Operator

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

One moment. Mr. Yang, your line is now open.

Martin Yang -- Oppenheimer and Company -- Analyst

Hi. Sorry about my technical issues. Can you hear me now?

Fermi Wang -- President and Chief Executive Officer

Yeah.

Brian White -- Chief Financial Officer

Yes.

Martin Yang -- Oppenheimer and Company -- Analyst

I have a question on CV72. So, do you expect your automotive and IoT customers to -- most of them to opt and adopt the Oculii integration that comes with CV72?

Fermi Wang -- President and Chief Executive Officer

That's a good question. So, I think, for the IoT, the adoption of a radar system will be slower because the core market, the IoT market is moving toward the radar, but not as fast as auto. Radar in auto space is basically everywhere. Everybody realized that they need to have a radar solution in any Level 2+ systems.

So, I think in terms of adoption that radar will go to auto space first. For CV72AQ, I think that the radar integration will come later because, right now, we are focusing on winning the video side. But however, at the second phase of software development, auto radar integration will come also.

Martin Yang -- Oppenheimer and Company -- Analyst

Got it. Thank you, Fermi.

Operator

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

Fermi Wang -- President and Chief Executive Officer

Thank you very much for you to joining us today and looking forward to talk to you on the next quarter. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Louis Gerhardy -- Vice President, Corporate Development

Fermi Wang -- President and Chief Executive Officer

Brian White -- Chief Financial Officer

Gary Mobley -- Wells Fargo Securities -- Analyst

Ross Seymore -- Deutsche Bank -- Analyst

Tristan Gerra -- Robert W. Baird and Company -- Analyst

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Kevin Cassidy -- Rosenblatt Securities -- Analyst

Quinn Bolton -- Needham and Company -- Analyst

Brian Ruttenbur -- Imperial Capital -- Analyst

Suji Desilva -- ROTH Capital Partners -- Analyst

David O'Connor -- Exane BNP Paribas -- Analyst

Blake Friedman -- Bank of America Merrill Lynch -- Analyst

Martin Yang -- Oppenheimer and Company -- Analyst

Joshua Buchalter -- Cowen and Company -- Analyst

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