Ambarella Inc . (NASDAQ: NASDAQ:AMBA), a leading developer of low-power, high-definition video compression and image processing semiconductors, reported a robust performance in the third quarter, with a 63% year-over-year revenue increase to $82.7 million. The company's success was driven by significant demand for its AI and edge computing solutions, particularly in the automotive and IoT markets. Ambarella has returned to non-GAAP profitability with a net profit of $4.5 million and has increased its cash and marketable securities to $226.5 million.
Key Takeaways
- Ambarella's Q3 revenue reached $82.7 million, surpassing guidance and marking a 63% increase year-over-year.
- Non-GAAP profitability achieved with a net profit of $4.5 million.
- AI-related revenue now constitutes roughly 70% of the total revenue.
- The company's automotive project funnel is valued at approximately $2.2 billion.
- Ambarella is developing 2nm process technology for next-generation AI applications.
Company Outlook
- Ambarella forecasts a 22-24% revenue growth for fiscal 2025.
- Growth is expected to continue in both automotive and IoT segments into fiscal 2026.
- The company is focusing on edge AI processing and computer vision solutions.
Bearish Highlights
- The company is facing project delays and cancellations, mainly in Europe and the U.S.
Bullish Highlights
- Ambarella's CV5 processor is expected to ship over 1 million units.
- The CV3-8655 AI SoC for advanced Level 2+ automotive applications has been introduced.
Misses
- There were no specific misses mentioned in the earnings call summary.
Q&A Highlights
- President and CEO Fermi Wang expressed confidence in the company's average selling price (ASP) growth.
- Wang highlighted the broad impact of next-generation AI on the market, indicating a transformative effect on current markets.
Ambarella's third-quarter earnings have positioned the company as a competitive player in the AI and edge computing markets, with a strong focus on automotive and IoT applications. Despite challenges in the automotive sector, Ambarella's strategic investments in advanced technologies and process development suggest a promising outlook for the company's future growth and profitability.
Full transcript - Ambarella Inc (AMBA) Q3 2025:
Conference Operator: Good day and thank you for standing by. Welcome to Ambarella's Q3 Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Louis Gerhardy, VP, Corporate Development. Please go ahead.
Louis Gerhardy, VP, Corporate Development, Ambarella: Thank you, Daniel, and good afternoon. Thank you for joining our Q3 fiscal year 2025 financial results conference call. On the call with me today is Doctor. Fermi Wang, President and CEO and John Young, CFO. The primary purpose of today's call is to provide you with information regarding the results for our Q3 of fiscal year 2025.
The discussion today, 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 based on currently available information and 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 file with the SEC.
Access to our Q3 fiscal 2025 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. The content of today's call as well as the materials posted on our website are Ambarrel's property and cannot be reproduced or transcribed without our prior written consent. Before we start the call, we want to inform you of our plans to participate in the following investor events during the Q4. On December 3, we will be at the UBS Global Technology and AI Conference December 4 at the Wells Fargo (NYSE:WFC) TMT Summit. On December 5, we'll be hosting BMP's bus tour, NASDAQ's London Conference on December 10 11, Nomura CES Conference on January 6th, and Needham Growth Conference on January 14th.
And of course, we hope to see you during the multiple sell side analysts hosted tours at our CES exhibition January 7 to January 10 in Las Vegas. Fermi will now provide an update for the quarter. John will review the financial results and outlook. Then we'll be available for your questions. Fermi?
Fermi Wang, President and CEO, Ambarella: Thank you, Luis, and good afternoon. Thank you all for joining our call today. Our Q3 revenue was above the high end of our guidance range, increasing about 30% sequentially in both our auto and IoT business. Company specific factors more than offset the overall weakness in the market, with our strength originating from our customers' new product reps, especially those incorporating our new higher price AI inference processors such as CV5. We again achieved a record level of AI revenue, which in turn contributed to a higher blended average selling price.
We are now forecasting fiscal 2025 revenue to increase by 22% to 24% year over year versus our prior estimate for revenue growth in the mid to high teens. Last quarter, we described our new product momentum as a series of waves and the next year in fiscal 2026, we expect the first wave from CV5 to continue and be augmented with the commencement of the 2nd wave CV7. We expect the 1st and the second new product waves to enable us to grow revenue again in fiscal 2026 with both auto and IoT expected to grow despite the weakness in the overall market. Our CV3 AD family of SoCs for level 2 plus and higher level of autonomy represents the 3rd wave with revenue expected to commence in calendar year 2026 or our fiscal 2027. During the Q3, we received the first silicon of our CV3-eight thousand six hundred and fifty five AI SoC, which targets advanced Level 2 plus applications, including mass market passenger vehicles and we are now delivering engineering samples to customers.
As you know, the global automotive industry is under significant pressure. So we are proud to forecast our automotive business is expected to grow this year and the next. I would like to remind you our automotive business is comprised of 2 different business, our existing ADAS business and our central domain controller business, also known as the CV3 platform. Our existing automotive business, mostly ADAS with majority of now AI SoCs, will represent about $80,000,000 this year with an estimated 5 year compounded annual revenue growth rate in the mid teens. Our CV3 platform targets a much larger, but still emerging revenue opportunity, Level 2 plus and high level of autonomy.
This new opportunity has the potential to significantly accelerate our 5 year automotive revenue CAGR beyond the mid teens CAGR I mentioned for our existing auto business. We remain highly focused on incremental CV3 design wins in an increasingly challenged automotive market. As you know, global vehicle production growth is slow, level 2 plus market penetration remains in the low single digit and OEM projects and the software development are delayed. In this environment, we have updated our automotive revenue funnel. As a reminder, our automotive funnel represents a probability weighted estimate of automotive revenue we could generate over the next 6 years from fiscal year 2026 to fiscal year 2,031.
At this time, our 6 year funnel is approximately $2,200,000,000 versus $2,400,000,000 a year ago, with one business representing more than $800,000,000 and the pipeline of more than $1,300,000,000 Due to a challenging automotive industry dynamic described earlier, there has been significant volatility in the last years within the funnel as customers' annual forecast was revised. Projects were delayed or canceled, new projects were added and the projects were either won or lost. Notably, we estimate layers about $2,000,000,000 not included in the funnel beyond year 6, the terminal year of our methodology. We remain optimistic about our long term secular trend for the Level 2 plus and the high levels of autonomy and the role that our CV3 platform can serve in this market. We are optimistic because our CV3 platform brings solution to some of the key challenges automotive OEMs are facing today, including power efficiency, scalability and open platform with the availability of optimized sulfur IP modules and a centralized radar.
We remain diligent in our efforts to get more CV3 business into the one column. I will now discuss representative customer activity in the quarter. In the automotive market, we highlight new models featuring a variety of advanced safety and automation features. Smart Automobile, a joint venture between Mercedes Benz (ETR:MBGn) and Geely introduced its Smart 5 model in October. This electric SUV features L2 ADAS system based on our CV2 with functional safety and is supplied by Tier 1 Aptiv (NYSE:APTV).
Xiaopeng, also known as XPeng (NYSE:XPEV), an electric vehicle pioneer in China, announced the P7 Plus, a mid to full size electric sedan that utilize our A12 video processors for the rearview electronic mirror. This e mirror is preinstalled 100% of the P7 Plus vehicles and start of production commence in October. Also in the Mirror market, the joint venture between Honda (NYSE:HMC) and Dongfeng launched its VCL electric passenger vehicle, which includes a camera monitor system. These features include interior displays that replace the left and the right side exterior mirrors. This system is based on our CV28.
Verizon (NYSE:VZ) Auto, a GV brand focused on development and the sales of commercial vehicles launched its Xunzi H8R light truck featuring a front ADAS plus driver monitor system based on our CV22AQ. Turning to our IoT businesses. We are announcing the 1st customer for our CV7 family, which represents the beginning of the 2nd wave of new product revenue I described earlier. In the enterprise market, Vucada introduced its next generation of camera including new 4 ks DONG, fisheye and PTZ cameras. Based on Ambarella's latest CV72, the new camera feature advanced analytics including AI powered search.
Vucata also introduced a new suite of video intercom and an indoor split mini camera all based on Ambarella CV25. Bosch (NS:BOSH) announced its new FlexiDome 8100iDome camera family based on CV22. They feature deep learning based detection of persons and vehicles even in crowded or congested scenes. Along.com introduced 5 Mega and 8 Megapixel Cloud IP Bullet and Dome camera based on our CV22. The camera include onboard recording and advanced analytics.
In Japan, iPro, formerly Panasonic (OTC:PCRFY) Security, announced the addition of 19 new models to its Aero PTZ camera list based on our CV22. We are encouraged to see better than expected adoption of our AI SoC in other IoT markets. While our products frequently target automotive and enterprise applications, our AI SoCs are designed with enough programmability to drive adoption in other IoT markets. For example, Insta360 recently introduced its ACE Pro 2 portable video camera featuring 8 ks video and the 50 megapixel photos. Based on our 5 nanometer CV5, the camera includes gesture and voice control and AI based highlight assistance.
InkStar 360 also introduced its LYNQ and LYNQ IIc AI 4 ks webcams based on our H22 video processors. Garmin (NYSE:GRMN) announced its GC245 and the 255 HD marine cameras based on our CV28 and featuring on screen distance markers and the guidance line to add with both dockings. Grab, a leading technology company based in Singapore, known for its super app providing diversified services, introduced its CATACAN 2 to collect street view images for map making. Our CV5 supports a 4 48 megapixel image sensors to full 3 60 degree viewing and provides edge AI processing. From this partial list of our customer engagement this quarter, you can see we continue to build upon our well established position for AI Computer Vision at Edge in both IoT as well as our traditional automotive ADAS market.
In fact, on a cumulative base, we have now shipped more than 25,000,000 edge AI SoCs and this helps set the table for the introduction of our new higher value SoC supporting more advanced AG AI networks such as VLMs, CLIP and the Gen AI. We believe the significant and continued build out of AI training and inference capacity in data centers for more and more advanced AI network is a leading indicator for the secular growth opportunity we see for AI inference processing at the Edge. Our strategic plan is well aligned with this and the 1st wave of new AI product revenue is underway. We expect the 2nd wave to commence alongside the 1st wave next year with a subsequent wave starting calendar 2026 or our fiscal 2027, including the CV3 and our 2 nanometer platforms. New product success is a key factor in determining our incremental revenue growth next year.
We are pleased to return to non GAAP profitability in Q3. We are highly focused on driving revenue growth and the positive operating leverage on the path to our target long term non GAAP operating margin of 30%. We have delivered 15 consecutive years of a positive free cash flow through the year of fiscal through the end of fiscal 2024 and we are optimistic our new products can enable us to build upon this positive record. John will now discuss the Q3 results and the Q4 outlook in more detail. John?
John Young, CFO, Ambarella: I'll now review the financial highlights for the Q3 of fiscal year 2025 ending October 31, 2024. I will also provide a financial outlook for our Q4 of fiscal year 2025 ending January 31, 2025. 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 along with acquisition related costs and restructuring expense adjusted for the impact of taxes. For fiscal Q3 revenue was $82,700,000 above the high end of our guidance range, up 30% from the prior quarter and up 63% year over year.
Non GAAP gross margin for fiscal Q3 was 62.6 percent at the low end of our prior guidance range due to product mix as we opportunistically drove some revenue upside from certain legacy processors at lower than planned margin. Non GAAP operating expense was $49,100,000 about $900,000 lower than the midpoint of our prior guidance range, driven by continued expense management and the timing of spending between quarters. We remain on track to our internal product development milestones. Q3 net interest and other income was $2,100,000 Q3 non GAAP tax provision was approximately $200,000 We reported a non GAAP net profit of $4,500,000 or $0.11 of earnings per diluted share. Now I will turn to our balance sheet and cash flow.
Fiscal Q3 cash and marketable securities increased $6,700,000 from the prior quarter to $226,500,000 Receivables day sales outstanding increased from 33 days in the prior quarter to 38 days and days of inventory decreased from 108 days to 94 days. Capital expenditures for tangible and intangible assets were $2,500,000 in the quarter and $6,200,000 for the 9 months ended October 31, 2024. We generated positive operating cash flow of $6,600,000 in the quarter and $8,400,000 through the 1st 3 quarters of fiscal 2025. Free cash flow in the quarter was $4,100,000 with year to date free cash flow of $2,200,000 We had 2 logistics companies representing 10% or more of our revenue in Q3. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia came in at 66% of revenue for the Q3.
Tricone and ODM who manufactures for multiple end customers was 11% of revenue for the quarter. I'll now discuss the outlook for the Q4 of fiscal year 2025. The continued strength of our customers' new product ramps, especially those enabled by our new product Wave 1 from our 5 nanometer CV5 cause us to increase our Q4 estimate. We are expecting normal seasonal decline in Q4 following the stronger than expected Q3. Fiscal Q4 revenue is expected to be in the range of 76 $1,000,000 to $80,000,000 with IoT and auto both flat to slightly down sequentially.
We expect fiscal Q4 non GAAP gross margin to be in the range of 61.5% to 63%. We expect non GAAP OpEx in the 4th quarter to be in the range of $49,000,000 to $52,000,000 with the increase compared to Q3 driven by CES marketing activities, increased headcount and project related engineering expenses. We estimate net interest income to be approximately $1,800,000 our non GAAP tax expense to be approximately $600,000 and our diluted share count to be approximately 41,800,000 fully diluted shares. Thank you for joining our call today. And with that, I will turn the call over to the operator for questions.
Conference Operator: Our first question comes from Ross Seymore with Deutsche Bank (ETR:DBKGn). Your line is open.
Ross Seymore, Analyst, Deutsche Bank: Hi, guys. Congratulations on the strong results and guide. I guess my first question for me is really what changed? I know you talked about the different waves and when they're coming, but the inflection point growing maybe 5% above the midpoint of your range, but an impressive 30% sequentially. And I know you called January seasonal, but it seems like it's even better than seasonal.
So what's the activity at your customer that's changing? And I guess what I'm really getting at is, I understand it's the new product adoption, but is there also just kind of shipping closer to end demand? So is this the beginning of secular growth? Or is it also bolstered by a cyclical rebound?
Fermi Wang, President and CEO, Ambarella: Thank you, Ross. I think first of all, Q3 results definitely there is this Q1 we rebound from the inventory correction. So when we give talk about last quarter, we did talk about the inventory correction will be done in the middle of Q3 and with that after that, it will be our growth of new products. And the Q4 is all about new products growth right now. And in fact that if you look at our run rate of CV5 for we can look at 2 different angle.
1 is from the market angle that for both auto and IoT growing and for IoT is really growing at IoT enterprise and as well as IoT other. These two categories, they both grow in a similar rate. And the driven the major driver is that new product cycle for CV5. In automotive market, you see that we talk about new customer like Sensara with CV22 and Rivian (NASDAQ:RIVN) with CV5. I think those are definitely helping us to have a growth on the automotive side.
So I have to say that maybe Q3, we rebound from the inventory correction, then starting growth on new product line in Q4 is all secular about our growth. But I also want to point out our Q3 is at $82,700,000 revenue and the Q4 guidance in a B. 78. So we're still seeing some kind of seasonality for Q4.
Ross Seymore, Analyst, Deutsche Bank: Whatever you're doing, it seems to be working. So congrats on that. I guess for my follow-up, switching over to the automotive funnel, it seems a little bit odd that the number would go down year over year considering you're adding a year where the growth rate at tail end should be larger. So I guess the big picture question is to the extent over the last couple of years, we've kind of thought as your auto business was going to be the incremental driver of significant growth going forward. Now it seems like the IoT, edge AI, whatever you want to call it, seems to be the bigger driver.
Can you just talk about has the growth profile of the company really switched more to the IoT side? Are you as optimistic as ever on automotive? Or is it something different the appropriate interpretation we should have?
Fermi Wang, President and CEO, Ambarella: I think we're still very optimistic about CV3 domain controller opportunity in the market. And I would say that if you look at the number, our one column continue to grow, but our pipeline is reduced. The reason for that is really that we first of all, the overall market is really weak, particularly in automotive market. And I think that you can get that similar feedback from everybody. But I think the most important thing for me is the Level 2 plus adoption rate is slower than we expected, right?
We start seeing we expect to see a lot of engagement. We continue to see a lot of engagement, but a lot of project got to push out into the schedule for different reason and some project even got canceled. So I really think that the Level 2 plus adoption is not as fast as we thought. That's probably the reason we start seeing that our funnel is not increasing. However, I still believe that Level 2 plus will become an important automotive market for everybody and that will replace the current level 1 and level 2 solution in the market today.
Conference Operator: Thank you. Thank you. Our next question comes from Tore Svanberg with Stifel. Your line is open.
Tore Svanberg, Analyst, Stifel: Yes. Thank you. And let me echo and say congratulations on the strong results. For me, could you just give us a little bit better sense for the mix here between CB2, CB5? I mean, I assume not a whole lot of CB7 revenue yet.
I think in the last call, I think you talked about CV5 potentially reaching 1,000,000 units this year. So any more color you can share with us on the mix of CV would be helpful.
Fermi Wang, President and CEO, Ambarella: Right. So maybe let me pull some data together, so to give you some point how to think about this. First of all, we talk about our AI revenue is roughly 70% in this quarter. And also we talk about our CV5 easily going to ship more than 1,000,000 units, we're probably north of that by a margin. So that CV5 doing well.
So and our CV5 ASP is anywhere between $25 to $50 That give you an idea of a CV2 our CV2 and CV5 contribution. And also I want to point out in Q3, this is the Q1 in the last 3 years that our video processor grow. And that's I think that's really because that inventory rebound inventory correction finish the customer rebound from there, help the video processor has a growth in Q3, but we expect that you will go back to decreasing gradually decreasing in the coming quarters.
Tore Svanberg, Analyst, Stifel: Great. And that was actually going to be my follow-up question. So as we think about fiscal 2020 6 and we think about the cyclical recovery and so on and perhaps even impact the gross margin, so video processing bouncing back is probably more of a temporary phenomenon. You're not really expecting that to continue to drive a higher mix throughout fiscal 2020 6?
Fermi Wang, President and CEO, Ambarella: That's correct. We haven't given any guidance on the fiscal year 2020 6, but we do believe that in fiscal 2026, our both IoT and auto will grow and we'll provide more details about the gross margin and the OpEx in the next conference call.
Tore Svanberg, Analyst, Stifel: Sounds good. Congrats again, Fermi. Thank you.
Conference Operator: Thank you. And our next question comes from Quinn Bolton with Needham and Company. Your line is open.
Quinn Bolton, Analyst, Needham and Company: Hey, guys. Let me offer my congratulations again. I wanted to ask, Fermin, just kind of coming back to the auto pipeline, maybe sort of a follow-up to Ross' question. You talked about some push outs and maybe even cancellations in Level 2 plus Can you give us a sense what percent of that pipeline is now sort of driven by the Level 2 plus opportunities and how that might have changed from the last year's pipeline?
Fermi Wang, President and CEO, Ambarella: Right. So maybe I'll give you a high level description. I think in the pipeline, we have 1 column and also sorry, Pharma have 1 column and the pipeline column. And in one column, I would say CV3 is a percentage is below 50%. But in the pipeline column, CV3 domain controller is way above 50% in that pipeline.
So in terms of level 2 plus maybe I'll add a little more color on that. We believe that when we look at the current price delta between level 2 plus and the level 2 and level 1, we think the price delta is still high and that really keep OEM worry about introducing a brand new product in that price point. So I think a lot of OEMs are thinking about how to optimize the price and for introducing a better Level 2 plus function features. That's something where we think we can help because we keep telling people that, first of all, I think our bond saving for our OEM is significant compared to our competitors. More importantly, our sulfur can be easily adapt to from a high end level 2 plus to lower level 2 plus by really with simple modification.
And less sulfur compatibility from the low end to high end level 2 plus will save a tremendous amount of R and D cost to our customers. So I think we are trying to address the pinpoint our customer when they're trying to the reason of today's Level 2 plus cost of delay, one is the cost, the other one is really the software development. So that's why we think we have a solution that we can address the pinpoint of our customers.
Quinn Bolton, Analyst, Needham and Company: Perfect. And then second question just kind of regarding the automotive pipeline. Geographically, how diversified is that pipeline? Is it pretty concentrated in China or another geography? Or do you see pretty good geographic distribution of that pipeline?
Thank you.
Fermi Wang, President and CEO, Ambarella: I think the distribution is pretty fair. In fact, a lot of people think we have a high concentration on China, which is wrong. I would say that 15% of our pipeline is from China. And from that you can see that we have probably a little higher percentage in Europe and that's probably the and everything else is probably well distributed. And Quinn, I might
John Young, CFO, Ambarella: add on top of that that our pipeline methodology is really, it was started and designed to focus on L2 plus opportunities. But the pace of adoption in China and the design cycles are very quick relative to the rest of the market. We kind of pegged our 6 year cycle to try and be a good proxy for a Western design cycle for models and for programs. And so our 6 year funnel, I think may not show all of the opportunity in China because those programs in China are quicker. So when Fermi says that the funnel has approximately 15%, that's another factor to consider.
Got it.
Quinn Bolton, Analyst, Needham and Company: Thank you.
Conference Operator: Thank you. Our next question comes from Christopher Rolland with Susquehanna. Your line is open.
Christopher Rolland, Analyst, Susquehanna: Hey, thanks for the question. And yes, similar to the last one, can you talk about your current geographic mix and why this might have led to outperformance versus some of your peers, those with, I guess, EU exposure in particular? And then just tying into this as well, there's a worry that there might be Chinese EV ship ahead in front of tariffs, both EU and U. S. Do you think that that's going to come back to haunt us all in the auto segment at all?
Or do you think you're pretty clean from that perspective? Thanks.
Fermi Wang, President and CEO, Ambarella: Right. So first of all, that exposure I talk about when I answer Quinn's answer Quinn's question is about the distribution of our pipeline. It's not about distribution of our current revenue. That distribution of our current revenue is quite different than the pipeline. So that if I understand your question, you're asking whether we have any a lot of exposure on different geographic location, but if you focus on our current revenue, I would say majority of our revenue coming in the U.
S, although it's manufacturing in Asia, but the end market, a big portion is the U. S. And then there are some European market, then Japan, Korea are all very big. And in China, again, also 15% of total revenue exposure in China. So that's how our current revenue distribute based on the geographical locations.
And then you asked about the geopolitical situation. My gut feeling is, if that situation change Ambarella is not going to be the only one. Maybe we'll probably have some impact, but not the biggest impact. But however, this is going to change. If the geopolitical situation continue to get worse, which I think will, it really depends on how much more tightened the rule going to be.
And the worst situation, of course, that the whole supply chain gets separated to that U. S. Component cannot go into China and vice versa, then we're facing a total different environment. And then we probably need to write off our 15% of total Chinese revenue. But I would say that's not just impact to Ambarella, it's impact to the whole industry.
For us, I don't think that there's anything particularly only target for Ambarella in terms of geopolitical risk. In the past, we had a lot of risk with high vision Dahua that was 4 years ago way past us. And our current revenue exposure is 15%, half automotive, half IoT. So I would say that we don't have a very significant geopolitical risk target on Ambarella only.
Christopher Rolland, Analyst, Susquehanna: Thank you for that, Fermi. And then you mentioned something about in the prepared remarks about a legacy processor, I think that continued to sustain and maybe that weight on margins. I wasn't quite sure there, but maybe talk about that and then when we could get a margin lift in particular in next fiscal year and what the moving parts there would be for that gross margin lift? Thanks.
Fermi Wang, President and CEO, Ambarella: Yes. Let me point you to the direction that for example, we did mention our video processor revenue growth in Q3. That was the first time for the last 10 years. Although when we talk about gross margin, we talk about our what's the word we use to the legacy products. So video processor is part of that and there are other processor in there.
But however, you can see that definitely that's one reason we started feeling a little pressure on the gross margin side. But I will say that the gross margin is really about mix. Every time our mix change, usually you will see our gross margin move up and down a little bit. But like always have been saying for quarters, we continue to believe that our gross margin will move gradually into our long term gross margin model, which is 59% to 62%, and it will take time over time to get there.
Christopher Rolland, Analyst, Susquehanna: Excellent. Thanks, Fermi.
Conference Operator: Thank you. Our next question comes from Kevin Cassidy with Rosenblatt Securities. Your line is open.
Kevin Cassidy, Analyst, Rosenblatt Securities: Yes. Thanks for taking my question. And maybe slightly different subject. Can you talk more about your 2 nanometer development? When do
Quinn Bolton, Analyst, Needham and Company: you expect tape out and
Kevin Cassidy, Analyst, Rosenblatt Securities: the target end markets for those products?
Fermi Wang, President and CEO, Ambarella: Yes. Thank you. First of all, we already kick off 2 nanometer projects and on our engineering roadmap, and we have engineers working on it. We expect the first 2 nanometer chip will tape out, let me say, Q4 next year in that period of time. And of course, the 1st chip target is for IoT and our enterprise IoT as well as IoT other section will benefit from this.
But of course that our 2 nanometer is also very important. You should consider 2 nanometer as a family chip just like what we did with 5 nano and 10 nano. And for 2 nanometer chip, it's important for us to consider build up our new technology to address the need of new AI platforms and new AI workload like Gen AI and other type of transformer network. And we definitely will upgrade our architecture based on 2 nanometer process
Kevin Cassidy, Analyst, Rosenblatt Securities: node. Okay, great. Sounds exciting. Maybe just from John's point of view is the OpEx include all the spending for 2 nanometer as you go through the fiscal year 2026?
John Young, CFO, Ambarella: Yes. I mean we haven't given guidance for 2026 for OpEx yet. But as Fermi said, we're already amortizing the costs for the 2 nano project. So I think OpEx I would expect OpEx to increase as just absolute number next year, but the 2 nano project is already baked into the run rate.
Kevin Cassidy, Analyst, Rosenblatt Securities: Okay, great. Thanks and congratulations.
John Young, CFO, Ambarella: Thank you.
Conference Operator: Thank you. Our next question comes from David O'Connor with BNP Paribas (OTC:BNPQY). Your line is open.
David O'Connor, Analyst, BNP Paribas: Yes, great. Thanks for taking my question. Maybe 2 from my side, if I may. Just firstly guys on the auto funnel again, going from that 2.4 down to 2.2. Can you kind of break that out how much was kind of canceled and then how much was added back in?
Just to give a sense of kind of the relative size of those cancellations. And also kind of on those cancellations, anything you can share geographically of where you saw most of those cancellations? And I have a follow-up.
Fermi Wang, President and CEO, Ambarella: Right. So I think the right word to describe that chart, if you look at all of the decrease, the increase is volatile, right? And in fact, it's volatile for reasons that, first of all, a lot of our customers pushing out the project and some of them reduce the forecast, but definitely near multiple projects are canceled. Most of cancellation happens in Europe and in U. S.
And obviously, there's definitely project that can't because so far reason of other transactions that impacted the road map of the company. So I think that definitely is play a big portion of the movement of our pipeline. But I will say that we add a project in there also based on the engagement of Level 2 plus So there's a plus and minus. But one color I want to make clear that, of course, that we have new design wins in there that we already announced. There's design win we haven't announced.
But they're also there's the downside is also mainly for a lot of our projects that we won last year and the forecast continue being reduced. Some of it is reduced by 10%, some of it is reduced by even larger margin. So that's the combination that we're dealing with in our pipeline.
David O'Connor, Analyst, BNP Paribas: Thanks, Fermi. That's really helpful. And just one follow on. Just on China again, you mentioned I think John mentioned it's 15% of sales today. And also you said that kind of in the pipeline it's 15% as well China.
But then China is innovating a lot faster. So can you just go back and explain why China isn't higher in the mix? Or where is where should China land in kind of a steady state in terms of the mix really? Thanks.
Fermi Wang, President and CEO, Ambarella: Well, first of all, I think John just tried to explain that even we won a design win from China because the design cycle usually 2 to 3 years instead of 5 to 6 years. So the impact the every Chinese design win doesn't matter if it's 1 or in pipeline, you only occupy 3 out of 6 years of that funnel. So that's why just from that point of view, China represent the smaller than the reality because all the other projects like U. S. Or Europe or even Japan, Korea usually that any design wins 5 to 6 years of pipeline.
So I think that's one reason, as John tried to say is because of that 2 to 3 year design cycle, we make China number smaller than it should be.
David O'Connor, Analyst, BNP Paribas: Thanks, guys.
Conference Operator: Thank you. Our next question comes from Suji Desilva with ROTH Capital. Your line is open.
Louis Gerhardy, VP, Corporate Development, Ambarella0: Hi, Fermi.
Louis Gerhardy, VP, Corporate Development, Ambarella: Hi, John.
Louis Gerhardy, VP, Corporate Development, Ambarella0: So, on the LQ plus wins you have, can you talk about the competitive landscape and your design win share across those? And I'm curious how impactful the Conky Bausch partnerships are in helping you secure those wins?
Fermi Wang, President and CEO, Ambarella: Yes. So in fact, the competitive landscape didn't change. Outside China in fact the worldwide is NVIDIA (NASDAQ:NVDA), Qualcomm (NASDAQ:QCOM) and Mobileye and us, right, the full company. And in China, you have to add the Horizon Robotics in there. So I think those are probably the company we're competing against.
And I think KangTian and Bosch continue to play a major role because right now with all the OEM design win outside China, OEM still want to work with a Tier 1. Our role to Tier 2 OEM is really providing silicon and sometimes providing sulfur, but they always need a Tier 1 sitting in between. So that county and the board always play a major role because they are bidding on the design win. We are helping them to work out to beat on those design win. So working closely with the Tier 1 continue to be important for us.
Louis Gerhardy, VP, Corporate Development, Ambarella1: Okay.
Louis Gerhardy, VP, Corporate Development, Ambarella0: Thanks, Fermi. And then my other question is on the customers and helping kind of adoption. You said customer software readiness is one of the factors in the timing of adoption. Is there anything you can do from your end to help that equation, help them speed that cycle along with software readiness? Or is that something you just have to have the customer do and then they're ready to adopt you?
Fermi Wang, President and CEO, Ambarella: Absolutely. That's one thing we really focus on to do. First of all, for example, we already introduced our software stack to many people. And more importantly, we already show some of our important customer that using our software stack, which is designed for Level 4, we can easily in less than 2 months adopted to the Level 2 plus type of sensor configuration. So that adaptation quick update application from Level 4 to Level 2 plus really help customer to understand using our software they can easily and also they can of course they can easily move from level 2 plus level 3 and level 4.
And that is important because that really significantly reduce their software investment. That's 1. 2, we also have a business model to enable our customer by licensing whatever sulfur module they think that we that they can leverage. For example, we knew that we are doing quite well on the perception side. And we definitely believe that we are one of the few really demoing using HD Map instead of HD Map to do a perception of driving.
And those kind of function features are very welcome. So any we are helping out if any customer want to use those function features, we are open to license and helping them to integrate to their other software stack. So I think the combination that we have our own software that is scalable from the level 2 to level 4 and also we are willing to license IP that can help our customer. I think those are two areas we can definitely help our customer to speed up their software development.
Louis Gerhardy, VP, Corporate Development, Ambarella0: Okay. Thanks, Mark.
Conference Operator: Thank you. Our next question comes from Martin Yang with Opco. Your line is open.
Louis Gerhardy, VP, Corporate Development, Ambarella2: Thank you for taking my question. Only one question regarding the automotive pipeline change. Given where you're seeing with European customers and U. S. Customers, does it change your outlook for potential margin contribution from those automotive design wins?
Fermi Wang, President and CEO, Ambarella: Yes. In fact, we talk about when we go into production with the CV3, our gross margin definitely is going to be in the low end of our long term gross margin model. So I think that's just because we are competing with the largest possible semiconductor company out there and we're expecting a stiff competition. So that definitely will change. But however, in the short term, I continue to believe that we will maintain our current gross margin model, which is 59% to 62%.
And although we are running above it for many quarters now, but we think we're gradually moving down back to that range.
Louis Gerhardy, VP, Corporate Development, Ambarella2: Got it. A quick follow-up. So again, on broad picture, company wide margin, do you think where do you think what factor would drive the margins? Do you think it's mix? Or any other factors you would point out that have a bigger influence on the long term margin outlook?
Yes.
Fermi Wang, President and CEO, Ambarella: So if you look at only short term quarter to quarter, mix is only reason. Every quarter when our product mix that we sell differently, that change our gross margin. That you see that in Q3, gross margin go to a low end because of But if you look at long term, I really think that before we hear CV3, we continue to move to our strategy is always trying to sell value to our customer. And when we move to 5 nanometer, people ask, can you really continue maintaining your gross margin model with higher cost of the 5 nanometer and we prove that we can. So I think for the our current business, particularly current IoT and automotive business, we are quite comfortable about our guidance on the gross margin profile.
But I think CV3, what you've since have time to work on it, to work with our supply chain and so on. So I will say that I think although we guided lower than our current gross margin to a low end of our gross margin model, but I still think we have time to work on it.
Louis Gerhardy, VP, Corporate Development, Ambarella2: Got it. Thank you, Prami.
Conference Operator: Thank you. Our next question comes from Richard Shannon with Craig Hallum. Your line is open.
Louis Gerhardy, VP, Corporate Development, Ambarella1: Well, thanks for taking my questions as well. Haven't been a lot of discussion on Gen AI in this call. So maybe for me if you can talk about the progress here since you announced this initiative, I mean, just over a year ago. How that's building out here? Maybe if you even want to use it in the framework, you're talking about your funnel in the automotive space, talk about it with Gen AI.
I guess I'd love to hear about that.
Louis Gerhardy, VP, Corporate Development, Ambarella2: Yes.
Fermi Wang, President and CEO, Ambarella: In the last four quarters, I think it's become very clear to me and to the company, Gen AI is going to impact not only just outside our current market, in fact all our current market will be impacted by JNai in a different way. In fact, all our customer looking at how JNai type of JNai model going to impact their business. So it's important for us to understand how our customer want and engage with them as early as possible. So we engage with them, start with N1, I would say, 5, 6 quarters ago And we show them what we can do with L1 type of performance and we're still working with several customer on the POC and the potential new products. And at the same time, when we realized that our customer in fact, our customer current customer told us they need to start looking at GenAI and looking at a clip type of function or other type of large language model to help their business, we start looking at CV72 or CV75 type of product.
How does that support our current customer? And frankly, we are very pleased to find out that the chip CV72 and CV75, we define for the enterprise security business can be used to run large language model, although it's not large, but it's a 3000000000 parameter clip type of new network and any derivative of that. So it definitely help our customer to start looking at how the clip can run on this kind of edge device in the camera. We're talking about 5 watt chip running a 3000000000 parameters, which is very difficult to find in the market today. And more on top of that, in fact, a lot of our the traditional security camera service provider, for example, those consumer or IoT home supplier like Ring, like Nest, They just announced that they're going to use gen AI type of service.
In fact, they all announced running clip type of a new network on the server and they charge a customer $10 a month. And we think that we can enable similar service at age and significantly reduce the cost of enabling that service. So I think we start seeing a new trend that Gen AI is not just for large language model for open AI type of company. In fact, you will come down to apply to all the major our current customer and maybe even other customer we can serve with. So our current focus on Gen AI strategy.
First of all, we continue to use N1 and CV7 family to engage customer. We believe we're going to see some of our customer putting a clip type of network into our CV70 family camera sometime next year. And that will be a first revenue from CV7 and we believe 2026 we're going to see some revenue as we expected. But more importantly, I think to address this chain AI platform, I think our 2 nanometer process is going to play a major role because we believe to solve the Gen AI in appropriate architecture, we need to go to the most advanced node. Of course, we need to solve not only just the processing performance, but also DRAM bandwidth.
But I think we do have a plan to address both.
Louis Gerhardy, VP, Corporate Development, Ambarella1: Okay. A lot of detail there for me. I'll follow-up with that one a little bit later, but thanks for all that. Thank you. My follow on question here is, so obviously, as you just detailed on a prior question here about the competitive dynamics here, competitive environment where you're the smallest company out there and probably later to market.
What kind of all the push outs that we've seen in the automotive space as exemplified in your funnel change year on year, do
Louis Gerhardy, VP, Corporate Development, Ambarella2: you think this is going
Louis Gerhardy, VP, Corporate Development, Ambarella1: to end up being a net positive for you allowing you to catch up in any manner? Maybe just kind of discuss how these the changes in the environment are going to be beneficial for you.
Fermi Wang, President and CEO, Ambarella: Well, first of all, I think the pushback, I said, the pushouts because, 1, the price need to be right, right? 2, the sulfur need to be ready. And both of them we have I think the market or the current the OEMs are definitely looking for both of that. And Ambarella definitely have a solution for both, our bound costs, our lower power consumption, so you can have a much lower cost on the battery and the power dissipation solution. That definitely helps.
The other one is sulfur solution that we think we have a scalable sulfur solution that can easily scale from the level 2 to level 4. I haven't seen we definitely believe that also is helpful. So I will say that the delay is going to help us, but I definitely think that we can we have a solution for the reason of the delays.
Louis Gerhardy, VP, Corporate Development, Ambarella1: Fair enough. Thank you, Randy.
Fermi Wang, President and CEO, Ambarella: Thank you.
Conference Operator: Thank you. Our next question comes from Gus Richard with Northland Capital Markets. Your line is open.
Louis Gerhardy, VP, Corporate Development, Ambarella3: Yes, thanks for taking my question and congratulations on the strong results. Just going back to the AI and Q consumer cameras, how much of an ASP uplift would that provide you guys as that capability rolls out?
Fermi Wang, President and CEO, Ambarella: Right. So, first of all, today, our average ASP the company wide average ASP, I would say, is around $12, $13 and it's continued going up. And going up because our CV2 for example, CV2 family ASP is around $18, dollars 19 Our CV5, like I said, is anywhere between $25 to $50 And the CV7 is probably somewhere between CV7 family, let me make clear, CV75 and CV72 is anywhere between low high teens to probably $30, $40 So you can see that the trend is definitely we're building more capability into our chip for AI performance and therefore driving up ASP. So we continue to expect our ASP growth will be there.
Louis Gerhardy, VP, Corporate Development, Ambarella3: Got it. And then just given the change in administration securing the border, supporting a bunch of people, I would imagine that the demand for security cameras is going to increase. And I'm just wondering at this point, are you seeing any uptick from your enterprise customers or potentially government entities?
Fermi Wang, President and CEO, Ambarella: We definitely see that IoT enterprise continue to grow. In fact, we only said that we believe this year, next year IoT enterprise continue to grow in a healthy way for us. I think that might reflect what you just said. But I definitely think that the current overall environment will continue to drive security camera growth.
Louis Gerhardy, VP, Corporate Development, Ambarella3: Got it. Thanks so much.
Fermi Wang, President and CEO, Ambarella: Thank you.
Conference Operator: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Fermi Wang, President and CEO, for closing remarks.
Fermi Wang, President and CEO, Ambarella: And I would like to thank everyone to participate today and looking forward to see you on the different roadshow and our CES. Thank you very much.
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