AMBARELLA INC 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 ended January 31, 2020 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 2020 fiscal year filed with the Securities and Exchange Commission, or SEC, on March 27, 2020. 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 the U.S. and China; 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 under Item 1A of Part II — “Risk Factors,” and Item 2 of Part I — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; the risks described elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. 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 semiconductor solutions for video that enable high-definition, or HD, video capture, analysis, sharing and display. In the last ten years, we have primarily focused on providing video and image processors for professional and consumer camera devices, such as internet protocol, or IP, security cameras, wearable sports cameras, drones and aftermarket automotive video recorders. Over the last several years, our development efforts focused on creating advanced artificial intelligence, or AI, computer vision, or CV, algorithms and high-performance, low-power hardware platforms to enhance processing acceleration, which we refer to as our CVflow™ architecture. The CVflow architecture supports a variety of computer vision algorithms, including stereovision, object identification and motion detection, obstacle detection and avoidance, terrain mapping technology, and face recognition, and allows customers to differentiate their products by porting their own algorithms and neural networks to our CVflow-based chips. Our system-on-a-chip, or SoC, designs fully integrate HD video processing, image processing, AI, computer vision functionality, 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 computer vision-based technologies are allowing us to address a broader range of markets and applications requiring AI video features, including IP security cameras, automotive cameras, consumer cameras, and industrial and robotic markets and applications. 22 Our revenue over the last three years has been generated primarily from sales of our SoC solutions for incorporation into specialized video and image capture devices such as wearable sports cameras, automotive aftermarket cameras, IP security cameras and cameras incorporated into drones. Our revenue from several of these markets, however, has recently exp erienced significant declines. As a result, we believe that our future revenue growth, if any, will significantly depend upon our ability to expand within camera markets, 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 auto-parking, 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 six 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. 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 six 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. 23 F inancial Highlights and Trends • We recorded revenue of $56.1 million and $160.8 million for the three and nine months ended October 31, 2020, respectively. This represented a decrease of 17.4% and 6.2% for the three and nine months ended October 31, 2020, respectively, as compared to the same periods in the prior fiscal year. The decreases in revenue were primarily attributable to lower revenue from the professional IP security camera and automotive markets. In the professional IP security camera market, despite continued growth in the North America and Asia regions in fiscal year 2021, lower demand from our two largest China customers caused by higher inventory build-up in fiscal year 2020 and escalated trade tensions between the United States and China, together with less demand from the Europe region, resulted in a significant revenue decrease in this market. The decreased revenue in the automotive markets was primarily due to an overall slowdown in the automotive industry. The decreased revenue was partially offset by increased revenue in the consumer IP security camera and consumer markets, including drone and wearable camera markets. In the consumer IP security camera market, revenue growth continued to be led by the home security and monitoring market in the North America region. In the consumer markets, incorporation of our solutions into newly launched products from Dajiang Innovation Technology Inc., or DJI, resulted in a ramp of SoC shipments in the third quarter of fiscal year 2021, partially offset by decreased revenue in the sports camera market. While revenue declined in the three and nine months ended October 31, 2020, respectively, we experienced sustained demand for our new CV-based solutions in the professional IP security camera market, generated revenue from CV-based solutions in the automotive OEM sensing market and made initial shipments of our CV-based solutions into the consumer IP security camera and automotive aftermarket in fiscal year 2021. • We recorded operating losses of $16.2 million and $47.2 million for the three and nine months ended October 31, 2020, respectively, as compared to operating losses of $7.2 million and $35.8 million for the three and nine months ended October 31, 2019, respectively. In addition to the declines in revenue, the increased operating losses were also attributable to increased operating expenses, partially offset by increased gross margin. The increase in expenses primarily related to increased employee benefit expense, SoC development cost as well as research and development grants from a foreign government in fiscal year 2020 that did not recur in fiscal year 2021. The increased expenses were partially offset by decreased travel expense, consulting services and a COVID-19-related foreign subsidy granted in the second quarter of fiscal year 2021. • We generated cash flows from operating activities of $18.3 million for the nine months ended October 31, 2020, as compared to $35.3 million for the nine months ended October 31, 2019. The decreased cash flows from operating activities were primarily due to increased net loss adjusted by non-cash expenses and decreased cash receipts associated with the timing of payments from customers. The decreased cash flows from operating activities were partially offset by decreased cash payments for other operating asset purchases and increased liabilities associated with the timing of payments to suppliers and authorities. • On March 16, 2020, we repurchased a total of 25,719 of our ordinary shares for approximately $1.0 million in cash. On May 29, 2020, our Board of Directors approved an extension of the repurchase program for an additional twelve months ending June 30, 2021. There were no shares repurchased for the three months ended October 31, 2020. As of October 31, 2020, there was approximately $49.0 million available for repurchases through June 30, 2021. Factors Affecting Our Performance COVID-19 Could Adversely Affect our Business in a Material 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 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. Moreover, if there is a significant outbreak that impacts Samsung 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 customers’ demand for our solutions. For example, in the nine months ended October 31, 2020, we saw an overall slowdown in the automotive industry which negatively impacted our revenue related to our computer vision-based solutions in the OEM video recorder market. 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. 24 Political and Trade Relations Between the United States and China Could Adversely Affect our Business in a Material Way. Trade tensions between the United States and China have been escalating, which has, in our view, created and will continue to create an uncertain business environment. If additional tariffs or trade restrictions are imposed on our SoC solutions or the products of our customers, or trade restrictions are imposed on our ability to conduct business with certain customers, there could be a negative impact on our operations and financial performance. For instance, during the nine months ended October 31, 2020, lower demand from our two largest China customers r esulted in our revenue decreasing in the professional IP security camera market. Even in the absence of new tariffs or trade restrictions, it is possible that China customers or potential customers could take actions to reduce dependence on the supply of components subject to United States trade laws, including our solutions. There are also risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business and provide incentives to government-backed local customers to buy from local suppliers. In addition, the escalating social and political tensions in Hong Kong could, in the future, impact the operation of our warehouse facility in Hong Kong, through which a substantial majority of our finished SoCs are shipped to customers or logistic partners. C ontinued deterioration in political, social or economic conditions in Hong Kong or future actions by the Chinese or U.S. governments , could possibly result in business interruptions, substantially delayed or lost sales, loss of inventory, or increased expenses . The materialization of these risks could have a material adverse effect on our business. Ability to Capitalize on Computer Vision Trends . We expect that computer vision functionality will become an increasingly important requirement in many of our current and future markets, including IP security, automotive, and 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, 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, and 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 CV 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. 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, 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. 25 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, 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 CV 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, 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 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 six 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 six 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. 26 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, 2020 2019 2020 2019 (dollars in thousands) Revenue $ 56,090 $ 67,922 $ 160,848 $ 171,520 Cost of revenue 21,298 28,819 63,078 72,127 Gross profit 34,792 39,103 97,770 99,393 Operating expenses: Research and development 36,573 32,480 103,575 95,917 Selling, general and administrative 14,468 13,791 41,348 39,293 Total operating expenses 51,041 46,271 144,923 135,210 Loss from operations (16,249 ) (7,168 ) (47,153 ) (35,817 ) Other income, net 673 1,917 3,231 6,308 Loss before income taxes (15,576 ) (5,251 ) (43,922 ) (29,509 ) Provision (benefit) for income taxes 1,502 (942 ) 3,375 2,302 Net loss $ (17,078 ) $ (4,309 ) $ (47,297 ) $ (31,811 ) 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, 2020 2019 2020 2019 Revenue 100 % 100 % 100 % 100 % Cost of revenue 38 42 39 42 Gross profit 62 58 61 58 Operating expenses: Research and development 65 48 64 56 Selling, general and administrative 26 20 26 23 Total operating expenses 91 68 90 79 Loss from operations (29 ) (10 ) (29 ) (21 ) Other income, net 1 3 2 4 Loss before income taxes (28 ) (7 ) (27 ) (17 ) Provision (benefit) for income taxes 3 (1 ) 2 2 Net loss (31 ) % (6 ) % (29 ) % (19 ) % 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, 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 CV applications in the IP security camera, OEM automotive and industrial and robotics markets. We derive a substantial portion of our revenue from sales made indirectly through one of our distributors, 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 highest 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. 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. 27 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 CV 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, 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 (Benefit) for Income Taxes We are incorporated and domiciled in the Cayman Islands and also conduct business in several countries such as the United States, China, Taiwan, Hong Kong, Italy, South Korea and Japan, 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 October 31, 2020 and 2019 Revenue Three Months Ended October 31, Change Nine Months Ended October 31, Change 2020 2019 Amount % 2020 2019 Amount % (dollars in thousands) Revenue $ 56,090 $ 67,922 $ (11,832 ) (17.4 )% $ 160,848 $ 171,520 $ (10,672 ) (6.2 )% The decreased revenue for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, was primarily attributable to lower revenue from the professional IP security camera and automotive markets. In the professional IP security camera market, despite continued growth in the North America and Asia regions in fiscal year 2021, lower demand from our two largest China customers caused by higher inventory build-up in fiscal year 2020 and escalated trade tensions between the United States and China, together with less demand from the Europe region, resulted in a significant revenue decrease in this market. The decreased revenue in the automotive markets was primarily due to an overall slowdown in the automotive industry. The decreased revenue was partially offset by increased revenue in the consumer IP security camera and consumer markets, including drone and wearable camera markets. In the consumer IP security camera market, revenue growth continued to be led by the home security and monitoring market in the North America region. In the consumer markets, incorporation of our solutions into newly launched products from DJI resulted in a ramp of SoC shipments in the third quarter of fiscal year 2021, partially offset by decreased revenue in the sports camera market. While revenue declined in the three and nine months ended October 31, 2020, respectively, we experienced sustained demand for our new CV-based solutions in the professional IP security camera market, generated revenue from CV-based solutions in the automotive OEM sensing market and made initial shipments of our CV-based solutions into the consumer IP security camera and automotive aftermarket in fiscal year 2021. Cost of Revenue and Gross Margin Three Months Ended October 31, Change Nine Months Ended October 31, Change 2020 2019 Amount % 2020 2019 Amount % (dollars in thousands) Cost of revenue $ 21,298 $ 28,819 $ (7,521 ) (26.1 )% $ 63,078 $ 72,127 $ (9,049 ) (12.5 )% Gross profit 34,792 39,103 (4,311 ) (11.0 )% 97,770 99,393 (1,623 ) (1.6 )% Gross margin 62.0 % 57.6 % — 4.4 % 60.8 % 57.9 % — 2.9 % Cost of revenue decreased for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, primarily due to lower SoC shipments in the professional IP security camera market, partially offset by increased shipments in the consumer IP security camera and consumer markets. Gross margin increased for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, primarily due to gross margin improvement in the professional IP security camera market as a result of customer concentration shift from the China region to the North America and Asia regions other than China. 29 Research and Development Three Months Ended October 31, Change Nine Months Ended October 31, Change 2020 2019 Amount % 2020 2019 Amount % (dollars in thousands) Research and development $ 36,573 $ 32,480 $ 4,093 12.6 % $ 103,575 $ 95,917 $ 7,658 8.0 % Research and development expense increased for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, primarily due to increased employee benefit expense and SoC development cost. For the three and nine months ended October 31, 2020, employee benefit expense increased by approximately $1.3 million and $1.9 million, respectively, as a result of issuance of stock awards, employee benefit programs and an increase in headcount. Our engineering headcount was 568 at October 31, 2020 compared to 560 at October 31, 2019. SoC development cost increased by $2.7 million and $4.2 million for the three and nine months ended October 31, 2020, respectively, due to project timing and the number of chips in development. The increased expense was also attributable to approximately $0.5 million and $3.7 million of research and development grants from a foreign government during the three and nine months ended October 31, 2019, respectively, that did not recur in the current fiscal year. The increased expense was partially offset by decreased travel expense and contractor services caused by COVID-19 pandemic restrictions. For the three and nine months ended October 31, 2020, travel expense and contractor services decreased by an aggregate of $0.4 million and $1.4 million, respectively . For the nine months ended October 31, 2020, approximately $0.7 million of a COVID-19-related subsidy was granted by a foreign government. Selling, General and Administrative Three Months Ended October 31, Change Nine Months Ended October 31, Change 2020 2019 Amount % 2020 2019 Amount % (dollars in thousands) Selling, general and administrative $ 14,468 $ 13,791 $ 677 4.9 % $ 41,348 $ 39,293 $ 2,055 5.2 % Selling, general and administrative expense increased for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, primarily due to approximately $1.0 million and $1.6 million of additional employee benefit expense, respectively, as a result of issuance of stock awards and employee benefit programs. For the nine months ended October 31, 2020, the increase was also attributable to approximately $1.6 million of additional professional services and facility related cost. The increased expense was partially offset by approximately $0.4 million and $1.2 million of less expenditures on travel and marketing activities for the three and nine months ended October 31, 2020, respectively, caused by COVID-19 pandemic restrictions. Other Income, Net Three Months Ended October 31, Change Nine Months Ended October 31, Change 2020 2019 Amount % 2020 2019 Amount % (dollars in thousands) Other income, net $ 673 $ 1,917 $ (1,244 ) (64.9 )% $ 3,231 $ 6,308 $ (3,077 ) (48.8 )% The decrease in other income, net, for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, was primarily due to decreases of approximately $1.3 million and $3.2 million, respectively, in interest and other income from our deposits and debt security investments as a result of lower interest rates and a higher number of debt securities purchased at a premium in the current fiscal year. Provision (Benefit) for Income Taxes Three Months Ended October 31, Change Nine Months Ended October 31, Change 2020 2019 Amount % 2020 2019 Amount % (dollars in thousands) Provision (benefit) for income taxes $ 1,502 $ (942 ) $ 2,444 259.4 % $ 3,375 $ 2,302 $ 1,073 46.6 % Effective tax rate (9.6) % 17.9 % — (27.5) % (7.7) % (7.8) % — 0.1 % 30 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 increase in income tax expense for the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, was primarily due to a decrease in the proportion of profits generated in lower tax jurisdictions, as well as an increase in non-deductible stock-based compensation. Liquidity and Capital Resources As of October 31, 2020 and January 31, 2020, we had cash, cash equivalents and marketable debt securities of approximately $423.6 million and $404.7 million, respectively. We invest in highly liquid, short-term marketable debt securities and hold these investments as available-for-sale securities. As of October 31, 2020, these securities had a fair value of approximately $214.4 million with immaterial unrealized losses caused by market fluctuations. Cash Flows The following table summarizes our cash flows for the periods indicated: Nine Months Ended October 31, 2020 2019 (in thousands) Net cash provided by operating activities $ 18,316 $ 35,284 Net cash provided by (used in) investing activities (25,961 ) 16,355 Net cash provided by financing activities 1,751 6,622 Net increase (decrease) in cash, cash equivalents and restricted cash $ (5,894 ) $ 58,261 Net Cash Provided by Operating Activities Net cash provided by operating activities decreased for the nine months ended October 31, 2020, as compared to the same period in the prior fiscal year, primarily due to increased net loss adjusted by non-cash expenses and decreased cash receipts associated with the timing of payments from customers. The decreased cash flows from operating activities were partially offset by decreased cash payments for other operating asset purchases and increased liabilities associated with the timing of payments to suppliers and authorities. Net Cash Provided by (Used in) Investing Activities Net cash used in investing activities increased for the nine months ended October 31, 2020, as compared to the same period in the prior fiscal year, primarily due to approximately $14.3 million of additional investments in debt securities, as well as approximately $27.9 million less cash receipts from the sale and maturity of debt securities. Net Cash Provided by Financing Activities Net cash provided by financing activities decreased for the nine months ended October 31, 2020, as compared to the same period in the prior fiscal year, primarily due to approximately $3.0 million of less cash proceeds from option exercises and employee stock purchase withholdings, $1.0 million of cash used for the repurchasing of our ordinary shares under the stock repurchase program, as well as an additional $0.8 million of payment for intangible asset purchases. Stock Repurchase Program Since the inception of the stock repurchase programs in June 2016, a total of $275.0 million has been authorized for repurchase, and to date, we have repurchased a total of 4,011,595 shares for approximately $175.8 million in cash under the programs. As of October 31, 2020, $49.0 million remained available for repurchases under the current repurchase program through June 30, 2021. 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 Operating and Capital Expenditure Requirements As of October 31, 2020, we had cash, cash equivalents and marketable debt securities of approximately $423.6 million. 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, these securities could contain 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 October 31, 2020, we had purchase obligations with our independent contract manufacturers of $37.1 million. 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 ended January 31, 2020. 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 ended January 31, 2020 for a description of our contractual obligations. Off-Balance Sheet Arrangements As of October 31, 2020, 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 2020 fiscal year filed with the SEC on March 27, 2020, except for the recently adopted accounting guidance on measurement of credit losses on financial instruments as discussed in Notes 1 and 2 of Notes to Condensed Consolidated Financial Statements. 32