Good afternoon, everybody. For one of the last sessions of the day, we have here with us Fermi Wang, the Chief Executive Officer of Ambarella Inc. Fermi, thanks so much for being here.
Yeah, thank you for inviting me here.
Great. So I've got a few questions of my own, but if anybody in the audience has questions, there's going to be a QR code up on the screens besides me, and those will show up here so I can ask those at the end of the session. Okay, so to get started with, you guys have sort of transformed the business, and IoT is now driving the majority of your revenue, and it's kind of clearly overtaken the auto end market. But on the other hand, your 2030 addressable end market estimates are more auto than IoT. So how should investors think about Ambarella today? Is it an IoT, edge AI company, or is it more autocentric once CV3 reaches scale?
The way I think about this is Ambarella is an edge AI company which includes automotive. If you look at the edge AI, how it's defined, my definition of edge AI is very simple. That for any AI application, you don't require connect to cloud. Majority of AI is running on the edge, on some device. That's edge AI for me. By that definition, autonomous driving is an edge AI device. So the way I look at it is Ambarella is focusing on investing in the edge AI market, including autonomous driving, autonomous drones, robots, and any other system that requires automation.
Okay, and how do you think about the balance of those two end markets? Do you have a strong view where that's going, or do you just make your products and wait for the market to tell you?
Right, so I think that autonomous driving is obviously the largest edge AI market today. So that's why we continue to think that it's a huge opportunity for us, and we're working hard to continue to secure the first major OEM design for us. However, that other edge AI market continues to be popping up in the last two years, and we start seeing more and more opportunity on the other edge AI device. We call the IoT side. It doesn't matter if it's autonomous drone, edge inference boxes, or that we talked last quarter, or AI video telematics box like a company like Samsara. All those new applications that were not part of it two years ago now, all of the opportunities show up, and that continues to drive our revenue growth. So in my opinion, auto continues to be the largest opportunity until it takes over.
I think that there are definitely opportunities in any other space that will continue to become a bigger portion of business. If you look at only 2030, I think automotive will be probably 50% of our potential 10% in that time.
Okay, you emphasize that there's a common hardware and software platform that you develop internally for both IoT and auto. So it's not like there's a team doing research for IoT and another for auto. And at the same time, you've also shipped more than 36 million SoCs, right? So really significant install base. So how durable is that platform advantage that you started to build within Ambarella as you've got larger competitors and new ASIC vendors that are starting to target this edge inference opportunity?
Right, so first of all, I think that the CNN hardware and software platform across all our silicon portfolio is important because, for example, for one silicon we built can serve automotive, can serve robotics, can serve telematics, can serve enterprise security with CNN software SDK, but we help our customers build applications on top of that. So from that point of view, and it's not only just one silicon, right? We have a family of chips. For example, CV2 family, we have six families of chips with different performance there for different price points on each chip. And the beauty for our customers is they must have multiple different product lines from the high end to the low end. With the CNN hardware and CNN software, with a family of chips, they can pick any performance and price point to serve the one market.
But with the CNN software, they can compile and go to a lower chip or high-end chip and build the product without really reinvesting on the R&D dollars. That becomes a really important factor that we can continue to secure to our investors and our customers because they understand the strength that we have this unique offering that with multiple chips and they only do software hardware development once and can do multiple products. I think that's definitely helping us to keep our customers with us.
Got it. And when you look across the market at the other people trying to address the same end market as you, you've got some really, really large-scaled players as well that you're up against, right? Some much larger than you. So does anyone have a larger platform advantage than you have?
In different places, definitely, right? For example, NVIDIA, which is really the largest possible AI company out there. I think they have a very strong position on the cloud, on the data center, which we will not touch. But on the edge, in fact, there is definitely a lot of discussion about, in fact, a lot of our robotic customers using NVIDIA chips as a first prototype or first generation technology. And I was talking to one of our customers. They told me, how do you want to compete with NVIDIA on the edge side? I said, for the robot, unless you are willing to put in the water cooling system, you don't have a solution for you. Definitely that, I think, CUDA and NVIDIA chips are very powerful and have performance, but they come with some issues that I think we try to address.
We try to come to the edge device, which the latency matters, the power efficiency matters, cost matters, the bond cost matters, and more importantly, in certain applications, video quality matters. All the things are my benefit. So I think from that point of view, we do believe that that's the reason we focus on edge AI instead of trying to compete with data centers. I think we have a better position in the market.
Got it. So portable video has been one of the really major IoT growth drivers. There's action cameras, body-worn cameras, aerial drones. How broad is the customer and SKU footprint in portable video today?
First of all, it's beyond those three products you talk about. There's a wearable camera. There are people using that, the web camera. There's the video conferencing and drones. So in fact, that portable video category can go into six, seven different product lines. And we have multiple customers in this we call the portable video and other segment. So from that point of view, I think this continues to be a growth area for us because some of the market is really old market, for example, webcam. But webcam was built for AI, using AI to improve video quality. It's a brand new offering, and we definitely think there's an offering, something that we can add value to. But also those drones with 360-degree camera, I really think that's a breakthrough because there's a customer going to build a drone with a 360-degree camera.
And when you put on a goggles and watch the drone flying around, just turning your head, you see the surrounding of the drones. That's a perception you've never seen before with any kind of drone. So from that point of view, I think this has become interesting with AI, more innovation going to products. Therefore, we think with more AI technology, adding more AI performance in there, will trigger even more interesting products in this portable video category.
It's interesting looking back because the company's roots are very much in security video, right? And this one kind of narrow category, and it's becoming a smaller and smaller portion of your mix over time as non-security things are far outgrowing it. So how do you see that mix developing over the next three to five years, and what are the trade-offs as those other categories grow more in terms of pricing or gross margin?
Right. First of all, our enterprise security, the percentage drops, but revenue grows. I just show you that. In fact, our overall revenue is growing. And in fact, one thing I want to say, for example, one silicon we use in that enterprise security is called CV5. The same chips using the drones, using the portable video, using the security camera, and using the video conferencing, and also using the car. In fact, Rivian is using that chip in their car. So that just showing you that that can really reuse our R&D dollars for same silicon, same software with totally different applications. That helps us to minimize R&D and leverage that to enable more different applications.
In the future, I expect the market that we're going to focus on is the application that can reuse our hardware and software platform and just by adding go-to-market and FAE teams to support the new applications. That's the market that we're going to focus on.
Yeah. I want to go back to the aerial drones for a minute. So they're clearly a meaningful new leg. How large do you think the volume opportunity is in terms of units over time? And are the barriers from here, are they more technical? Are they competitive? Are they regulatory? What needs to happen for that category to grow?
I think it's above, all above. Let me talk about this, but drone today is roughly 10 million units. If you take out the toy drones, that's not counted. All the other drones combine 10 million units, including we call prosumer drones and also commercial drones. Prosumer drone is really. I define that as people use that to capture video, right, and to produce video. This is 9.2 million units and dominated by DJI, which is well known, and nobody really comes close to compete with DJI in the last few years until recently the window of opportunity opens, and it opens because the U.S. government put a ban on the DJI drone in the United States, and that creates roughly. I would estimate 1.5 million units of a market available for the second best, and I think that creates opportunity for us.
DJI have been using their own silicon, so that is now available to us. But the market, I think, opened up for that. I think we're going to see multiple drone companies going there to go after this market. And then hopefully, with their momentum, they can go to other markets and compete with DJI. But that's definitely a difficult situation. In terms of regulation, it's very well documented, right? In the U.S., there are definitely regulations about what kind of drone you can fly, what kind of rules you need to apply, all of that. I think most of the drone players will follow that rule. I don't think that's an issue, so from the point of view that I think there's definitely a window of opportunity for new players to come in, and we would like to be one of them.
Shifting over to auto. So you continue to invest behind the CV3 family for L2+ to L4 ADAS feature domain controllers. So what are the gating factors that are controlling the pace of you announcing your first OEM award?
Right. I would say this year is definitely particularly difficult for level two plus cars for the Western players. If you look at, we talked about in January, we talked about the VW bid, right? And we lost to Mobileye. But after that, even our competitors didn't talk about many design opportunities in the level two plus or above. I think there are two reasons behind it. One is I think a lot of people still cannot come out with a software solution that really can address level two plus efficiently. And that really delayed the projects. The other thing is really that the features and performance of Chinese OEM products, L2 plus and also Tesla's FSD, proved to be really powerful products and tried to compete with them.
I think a lot of Western OEMs are still trying to figure out what's the spec, what kind of timeline they need to. So I think they delayed the decision because of those two reasons, and so we continue to believe that this is a market we need to focus on just for the reason that this is the largest opportunity for the AGI market, and we need to continue to invest, and we continue to work closely with OEM. But there's another reason. In the last two years, it's become very clear that our investment for CV3 for the domain controller, both hardware and software, can directly apply to robotics, particularly the mobile robots, right? In fact, if you look at what are the requirements for mobile robots, you need a great perception to understand the environment.
Then you need to have path planning to plan how you move around. Then you need to have decision-making in the autonomous driving cars, how you drive. In the robots, it's how to use the environment information to perform other functions. So from that point of view, from the perception and path planning, everything we did for the CV3 can be totally reused for this function. So with autonomous driving, that we continue to focus on. But with the robot momentum on the market, we definitely believe this is an area that we can reuse our technology. That's another reason we continue to focus on technology development.
Yeah. So you mentioned Mobileye as one competitor in the automotive space. There's also Qualcomm and NVIDIA. There's a lot of emerging Chinese vendors as well. So how do you like the competition in that space? And what's your right to win or your competitive differentiation against them?
Right. Well, I think the biggest problem for us, we are the smallest company in that list of the competitors. However, I do believe that we have the best technology among them in terms of power efficiency, the performance per watt, also providing a software package as a licensing model instead of trying to bundle hardware and software together. So from this point of view, I do believe we still have an opportunity to continue to gain momentum in CV3. So competing with large corporations is difficult. But the key is today, like I said, most OEMs are trying to figure out how to compete with Tesla's technology, right? And I think that we believe that if people really focus on technology differentiation, we have a chance to be selected as a supplier to those OEMs.
And once you win your first one of those opportunities, can you size how big one of those programs could be over its lifetime and what sort of slope or ramp we would see once won?
Let me use a VW project that we lost as an example. We were the runner-up in that project. Had we won that, it's easily $700 million-$800 million lifetime value to the company. While we are doing $390 million targeted revenue this year. So that impact can be huge to our company in terms of the momentum of the revenue growth as well as the investment in different directions.
Yeah. So in video security, competitors like Hikvision are normalizing inventory, and then there's some export control considerations as well shifting around. So how is that market looking for you? And how do you feel about your long-term share opportunity relative to the domestic Chinese?
Enterprise security, you are talking about?
Yes.
OK. In fact, we are out of China already. In fact, five years ago, when the Entity List was implemented by the Trump administration at that time, we were banned from selling to Hikvision and Dahua. Right afterwards, the Chinese government basically says they prefer using domestic solutions in China. So we have zero revenue from the China market for our enterprise security. However, that helped us. We kind of transitioned our focus to focus on non-Chinese solutions. In fact, if you look at the major enterprise security camera vendors outside, we are probably the biggest supplier to all of them. So from that point of view, I still feel that enterprise security continues to be an area that will give us more growth.
The growth is not coming from. It's not only coming from the size, the growth of the market share, but the AI ASP that we continue to drive higher and higher. Our ASP six years ago was $6. This quarter was $16. And the reason is because we introduced AI chips in that sixth time and gradually moved up our AI ASP. And the AI ASP growth will continue because all the chips that we introduced, for example, our third-generation AI chipset starting from CV75 and CV72, the ASP is higher than our CV2 family by 30%, 40%. And then the CV3 is close to $100. So we expect our ASP will continue to grow. I think to go back to enterprise security, the growth, of course, some of the growth will come from the market share growth, but that's limited.
But ASP potential growth can be our driver for that market.
That's actually one of the places I wanted to go next. So for fiscal 2026, the guide is that revenue growth will be more or less even amounts from units and ASP. Clearly, you've got some much higher-end SoCs that carry much higher pricing. So in the kind of nearest term, there's a lot of potential for ASP growth. But over the longer term, how does the unit versus ASP mix? How does that shake out?
It's really about what kind of design we can get. Had we got a VW, the unit can grow also significantly. So I think that that's why we need to continue to focus on bigger TEM , the market, right? So when we look at market opportunity, we definitely want to say if there's two different markets, the selection has to go to the higher market TEM so that we can get more potential growth out of that. So definitely, we want to go to the bigger market so we can grow unit number. But however, the ASP growth is really about more and more deliver more and more AI performance, really, which is required by our customers. And more AI performance means people want to implement not just higher TOPS, if you may, but also different types of model.
In our second-generation AI chip, we focus on CNN type of AI model. Our third generation will focus on transformer or Gen AI type model. And the majority of revenue that we see today is still from our second generation. Our investment on third generation hasn't generated much revenue at all for us. So I think when we move to the third generation, the ASP will go higher because of performance. And that will definitely continue to help to drive our revenue growth.
And each generation is clearly being introduced at a much higher performance than the last. But if we think about over the life cycle of any given chip, what's the deflation or the kind of cost down that customers are expecting at any given level of performance?
Yeah, this is a.
Yeah, there's the fate of the semiconductor industry, right?
Yeah.
Customers expect you every year you drive down your cost. There are two things we need to do. We drive down our cost of our supply chain at the same time, which is getting more difficult because we're already in five nanometers. We're going to do four and two nanometers. With limited suppliers in this space, driving down that cost is getting difficult.
Yeah.
So, however, while you do this, you continue to drive down the cost, drive down your ASP to a certain product. It's getting more important. You overlay with a new product line, which has a higher ASP and also kind of compensates the ASP drop and the revenue drop because you give the better pricing to your customer. And to overlay that product line is important. And you cannot just fake an overlay. But most of the time, if your customer is telling you, "This is a new feature, new performance, new video quality, we're willing to pay more," this is the better way to overlay a new product line, which gives us a benefit of compensating the price reduction every year.
Do you feel that you're approximately able to match the cost down expectations of the customers with what you're experiencing on the cost side and sustained gross margins? I think there's a 60%.
In the last 20 years, we have been successfully doing that. Then going to two nine o will be an interesting experience for us because two nine o really is powerful, right? But however, it's very expensive. And we're definitely counting on our supplier to continue to work with on the cost structure and the price. But I think that is definitely our goal. And we believe that we will continue to maintain our long-term gross margin model of 59%-62%.
What about operating expense? So right now, it looks like OpEx is growing in the low teens kind of range. There's a lot of investment on new products and field engineering and things like that. And the world is changing fast, and you want to be ready when it gets here, right? So how are you balancing continuing to invest in what you see as the most interesting opportunities on one hand with showing operating leverage in the model as you're growing revenue? How do you weigh those?
I think getting operating leverage is the most important financial metric for us. We continue to value our revenue growth and to determine what kind of OpEx grows every year for us. We have to make sure that we continue to show up with operating leverage for our investors and also for the health of the company.
Okay. So when you think about your kind of cash generation in the near term, how do you think about allocating between R&D, potentially M&A, and returning cash to shareholders?
Right. One thing that our investors continue to give us feedback is that, "Fermi, you have been spending 40% of your total revenue on R&Ds." I think that's a price to pay to compete with NVIDIA, Qualcomm. But however, we need to continue to show two things. One is we need to continue to show the leverage on the operating profit that we talk about. But the other thing is on the operating cash point of view, we have been positive on the operating cash for 16 years in a row. So that just shows you that we are trying to balance both, right? We want to invest heavily, but we know there are some financial disciplines we need to follow. And that's what we try to do. In fact, this quarter, we generated $30 million cash flow. And then also that our cash position is roughly $280 million.
I think it's very healthy for our size. And we'll continue to invest R&D. But we think of the discipline we talk about. But also, we are looking at M&A. I think although today, I think the market valuation is really high for the private companies, but we continue to look at opportunity, particularly on two things. One is algorithm. One is software that's related to our market, particularly on the AGI-related market. I think if there's anything that's close to our space and the things that we cannot do internally, I will definitely continue to look at M&A as a way to improve our offering to our customers.
And what's the return from an acquisition like that? Is it something that helps kind of establish and increase the moat? Is it something that with more software capabilities, you can then charge more for the products? And so it just flies directly into revenue?
You know, we have been very selective on our M&A. Most likely is that in the product offering that we need to go, but there's a piece of a technology that is required for serving a certain market, but we don't have that. And we look at it as taking too much time for us to develop ourselves. That's where we really look at M&A at a time. So it's really about making sure that we don't have a technology hole in our offering to our customers.
Got it. One more question on M&A. Clearly, the strategic value of edge AI assets is really high to many larger players. There's been a lot of conversation about consolidation as well. So how do you weigh for Ambarella, weighing independent and getting to own your own destiny on one hand versus your potential value to an acquirer on the other?
Right. In fact, I have been saying that I believe that if there's a much bigger platform that owns Ambarella technology and willing to invest on that, I think we can grow faster than we are, right? And I still believe that. But I think there are two assumptions. One is people willing to take over this and continue to invest on that. I think that that's the kind of one I'm looking for.
Got it. Well, it's been fantastic to catch up with you today. Thanks so much for your time, Fermi.
Yeah, great. Thank you very much. Thank you.