My name is CJ Muse, semiconductor equipment analyst with Cantor Fitzgerald.
I'm very pleased to have Ambarella. We have Louis Gerhardy , VP Corporate Development, reports to Fermi Wang, CEO, and responsibility for planning and capital market activity, including investor relations.
Welcome.
Thank you, CJ.
Great to have you here. Maybe just to start, with the current environment, while you just reported earnings a couple weeks back with a solid beat and raise, could you give us a brief recap of what you think were the most important takeaways?
Sure. Yeah, maybe before doing that, we have a presentation online that, please feel free to download.
Take a look at the page two, the risk forward-looking statements. We will be making forward-looking statements, so please refer to those disclosures there. We reported about two weeks ago, and a solid quarter, in line revenue, EPS were $0.02 or $0.03 better. For this full year, we're in our fiscal 2027. Our estimates, revenue estimates on the street went up about 3%. The story is like last year, we grew 37%. The year before that, we grew 26%.
This year, at the current time, we're expecting to grow 10%-15% year-over-year, really on the back of some very strong new product cycles we see occurring this year, and then again next year.
That is the summary of the quarter. Unfortunately, as the call was winding down, there was an ITC decision that was made against one of our customers that for about foiur hours wasn't clear what the impact would be. But we woke up our sales team in China, and they talked to the customer, and turns out there's no impact from this ITC ruling, but it did create some FUD fear, uncertainty and doubt in our stock price, which I think has led to an interesting opportunity today.
Just to follow on that, I think, obviously, semiconductor stocks have declined given what's going on geopolitically, but I think yours is down more than the SOX. I'm getting kind of what am I missing question from investors.
Yeah.
I'll ask you the same.
Yeah. I think there's two ways to think about that. The most important that you want to hear from me is kind of what we can control, and I'll cover that. I think in terms of stock price performance, we moved from 70 to 50 or so where it is today. Much of that is this FUD that was created by this ITC decision. Again, our customer in Ambarella, we see no impact from that ITC decision. Just the short story, I'm happy to go into it more, is that the product that was found to have infringed was already redesigned, and it's on the store shelves as of July of last year, 2025. That seems to be a non-issue, but it did create some FUD. Then, of course, with the war, just geopolitical situation recently, that's created some other uncertainty.
Just my view structurally of the market and how our stock trades is that, if you get a little bit of selling from the passive side, whether it's an index fund or an ETF or something thematic, then there's some FUD on the active side that just creates an opportunity like we have in front of us today. What are we missing?
It's a very good question in terms of our call. If you listen to our earnings call, I think you've got the full story there at this point in time. The question we get fed back to us is, "Hey, you're talking about new product cycles, but your revenue growth is going from 37% last year to your guidance at the midpoint is 12.5% growth. That's quite a bit of deceleration.
What am I missing?" The first point I'd make is that ambarella has a reputation of being quite conservative in how we give guidance. In fact, last year, when I was here, we were talking that our revenue growth would be mid- to high-teens. We ended up doing 37% growth. As we could ascertain how our customers' orders would play out throughout the year, we kept raising the numbers. Not promising that's going to happen this year for sure, but where we sit at this time, we feel good about 10%-15% growth range.
The reason that we're not guiding higher at this time is very similar to last year. While we know we have some really attractive new product cycles, we want to understand how will our customers take those to market?
When will it start? What is the slope of their growth? How will our customers adopt these new products? As we learn that throughout the year, we'll update our guidance appropriately.
When investors say, "What are we missing?" that's how we respond. We've got rich new product cycles, and we're taking a conservative stance with how our customers bring these to market.
Makes sense. Maybe taking a step back and thinking bigger picture, you're building Edge AI platforms. Ambarella's essentially transforming from an edge perception to an Edge AI kind of company. How, I guess how should we be thinking about the required kind of ingredients to be successful here?
You're in terms of what you're targeting where does Edge AI kind of begin and end?
Ambarella's heritage founded in 2004, IPO 2012. The first 15 years was video processing or call it a perception module, where we'd collect information through the lens of a camera, and then data would be provided for human viewing purposes, frequently in a battery-powered device. We had to provide high resolution. Around 2015, began to look at video analytics, which became AI.
By 2019, we're out with our first proprietary AI accelerator that we didn't sell standalone, but we took the AI accelerator, and we integrated it with a perception engine into single chip AI SoC for the edge, where that single chip could ingest data from a variety of different sensors or even digital media.
Then AI would do the processing and decision-making that would enable a machine to perceive the world and make decisions either partially or fully autonomously. Here we are, fast-forward to 2026, 80% of our revenue now is coming from Edge AI. That business for us at Edge AI grew about 50% last year and is the story at Ambarella now.
If you kind of break down the key functional blocks in our chip, I'd argue the AI accelerator part of our story, which is indifferent to how the data is ingested. Again, we can take in digital media, we can take in physical AI, many different types. That is our strongest value proposition. But you asked also how do we define Edge AI?
I think there's a couple of ways, maybe two ways I could quantify it. Before I even do that, Ambarella has historically in a network provided the human viewing and AI to this point at the edge endpoint of the market. Edge endpoint being the terminal device in a network. Again, it's often operating off of a battery.
That has been our first market and all of our revenue today in AI, that 80% of the $390 million we did was all edge endpoint. We have now said in addition to that, we're moving into the next ring of opportunity, which would be the edge infrastructure, which would be that first point of aggregation. That is a new business area for us.
We'll have a small amount of revenue this year, but we're starting to talk about more design and activity and articulate the use case and taking some other strategic actions to better position ourselves for that market. In terms of quantifying how we define Edge AI, if we think about it in terms of like the AI TOPS performance, if you will, for us, we're in that range of 1-500 tops effective TOPS-type performance range.
There's a lot of guys below 1 TOPS. Of course, there's a couple of guys above that range. That would be one way to look at it. Another way to kind of quantify what we mean by Edge AI is how many parameters can we support.
We can support anywhere from tens of thousands of parameters for like a CNN type network, up to 34 billion parameter models, in chips that we have today with line of sight to support 100 billion parameter models, in the future. Those would be some of the ways how we define Edge AI, what it means and what our opportunity is.
Maybe to level set kind of where we are today at that 80% of your revenues, you've got 12 different AI SoCs, and I believe you've kind of highlighted 370 unique AI customer projects.
Is there kind of an easy way to define the end markets you're targeting i.e. robotics, auto, the edge infrastructure within kind of where we are today and how you see that kind of progressing over time?
Yeah, the answers are very different for those areas. Our business today of that $390 million in revenue last year, 78% was from IoT, many different areas I'll cover. Then auto was 22%. The 78% IoT, think of three buckets. The first two, roughly 45%, similar size, 45% or so each. That would be security, and the second one would be portable video.
The third bucket has a lot of green shoots and in many different markets, some of which can be very significant. We'll cover that when we talk about the opportunity in the future. You'd have things like access control in there. You have wearables. You have robotics, many different form factors, and you have the edge infrastructure I was talking about before.
You have enterprise video conferencing. All these areas are happening for us to some degree, but not generating much revenue today. Then on the auto side, and again, just covering our revenue from last year, it's 95% of the revenue. Again, 22% of the whole company. 95% of that's coming from the category that's growing very nicely called telematics.
It's safety. It's ADAS, like L1 to L2 type stuff. Then about 5% would be what we call auto autonomy, which would be L2+ to L4 type applications. That's how the business is set today, but turning to the opportunity question, what do we see as our biggest markets at this time long term? Clearly be robotics, where we've started to generate revenue in drones. We've announced some wins in different form factor systems.
The second market would be auto. I think most investors are pretty well aware of our position in auto autonomy. We're still looking for our first material passenger vehicle win, but we have commercial trucks. The third area I've already mentioned is the edge infrastructure. That first point of aggregation in a network where multiple endpoints get aggregated in a single box and some AI is performed on all that data.
Perfect. At CES, you announced several additional go-to-market initiatives. I guess how incremental is that to what we just discussed?
Ambarella has invested cumulatively, like in that 10-year period when we first started looking at video analytics and then AI, about $1.3 billion into edge AI R&D, specifically focused on that market.
We've only had revenue really the last 6 years from the market. Our cumulative revenue is about $1 billion. That's changing because as I said at the beginning edge AI grew 50% for us last year, so that we had 310 out of $320 million of edge AI revenue last year. Our AI R&D last year might have been $170 million, right? We've turned the corner, and edge AI business is growing very quickly.
What these new initiatives you referred to, the new go-to-markets mean is that we're looking for all of our business today has been direct to customer. We're saying, how can we accelerate the revenue growth even more with the existing technology we've developed? We've introduced two incremental go-to-markets. One would be an indirect sales channel, which means we'd be able to support smaller to mid-size customers. That is new to Ambarella. 100% of our revenue is direct today.
We have no channel presence at all. That's one new initiative that's well underway. In fact, we had some announcement just yesterday at Embedded World, where we have a large presence in Germany, exhibition that's happening right now.Matt Nyika made some announcements about our indirect ecosystem.
It's not going to generate revenue this year, but it should start to contribute next year and potentially long-term be very material because revenue from that channel can be long tail. In terms of the incremental new go-to-markets, indirect is one.
The second one, that we also kind of formalized during our CES briefing, would be a semi-custom chip strategy. In that case, we'll work with either existing or new customers. We have a lot of interest in this, and they have come to us given our established AI position in Edge AI. We ship 42 million Edge AI processors to date, and they might want to use our Edge AI accelerator. They might want to use our perception module. Hopefully, they want to use both, put some of their own IP in there.
Maybe we give them field of use exclusivity in a certain market, but we can sell the standard product to many customers. That's a new initiative that actually will start to generate revenue in the first half of our fiscal 2028. We haven't said too much about it because there's a customer behind this with some field of use exclusivity, and they kind of dictate what we can and can't say.
We have said this first semi-custom project is two nanometer gate-all-around. We tweaked it out during CES. As the wafers move through the fabs we'll give more updates and refine our thoughts. Currently, we're saying that first semi-custom project will generate revenue in the first half of next year.
That's part of our new product cycle story I was talking about before.
is that on the infrastructure side or?
We've said it's edge endpoint related on the IoT side.
Gotcha.
It's not an automotive product.
How have discussions kind of proceeded since then for potentially other kind of design wins?
There's a lot of interest. I think it's because you had mentioned some of the data points before, but we've really built a platform for Edge AI with these 12 chips, having shipped 42 million Edge AI chips cumulatively, having ported successfully 200 different model architectures. Not models, model architectures. I think we haven't found a model that we can't do well on our proprietary AI accelerator.
The cumulative R&D investment I mentioned, we have 370 customer AI projects that have gone to production. This is getting out that we do have a strong platform in that portfolio of chips.
Just as importantly, we have our Cooper development platform, which is just critical in order to enable customers to get their software and their application stack programmed efficiently into our chips and into the market. When I talk about platform, it's both the SoC as well as our Cooper development platform.
Excellent. Maybe sticking with platform, you're starting to ramp your transformer business with your third generation offerings. CV75, CV72, CV7, as well as N1, versus your just CNN second generation offerings. curious what kind of customer traction are you seeing there?
Well, transformer synonymous with Gen AI discussion, is something that we think is going to happen in all of our businesses. In fact, some markets, maybe robotics couldn't really happen without it because the incremental utility of Gen AI and transformer-based networks is so powerful.
That, by the way, doesn't mean CNNs go away. CNNs are so efficient at doing processing for things like detection and classification of objects, will always be used. This new generation of chips, starting with the CV7, CV75, CV72, N1 family can do both CNN networks as well as transformer networks. They'll coexist, and the chips can do both type of processing.
Probably the first market you'll see it with Ambarella will be in the security camera market, which was, by the way, given AI at the edge use case is so strong in that market, five years ago, that was the first edge AI market that took off for us. It'll probably be the first to take advantage of these new capabilities of Gen AI.
I guess I think agentic AI has really kind of come to the forefront in the last kind of few months. Just curious, if you take a step back and you look at that, how does that kind of inform the go-to-market strategy, the potential opportunities for you?
As we investors think about you building kind of your Edge AI business, are there particular like end market subsegments that we should be watching closely?
Is there a very large kind of pipeline opportunity for you, or is it really more breadth of smaller opportunities?
Yeah. Just kind of agentic brings you back to the kind of GenAI and what incremental utility it does offer. Of course reasoning and diagnosing problems and taking corrective actions and navigation as an example of that, which is used in robots or cars as an example. Or GenAI can be used for creating content, whether it's using text to create video or creating text from video and summarizing the scene, which is another very powerful thing that some of our customers are doing. Then there's information processing that GenAI can do, which is summarizing a complex document or solving complex problems.
The one you asked about is really about operational automation, which is where agentic AI comes in and with a defined purpose, it can execute like multiple tasks. So it's a very powerful catalyst for the type of AI processing we sell because there's this agent might exist in a microcontroller, but then the processing probably going to be different types of hybrid processing, where some is done locally in the edge, some might be sent into the data center.
We think this, these different value propositions I mentioned will play out in all of our markets. It's really up to our customers. We show them what our processing can do.
We might use open-source models, like if you see it at CES, we'll give examples to customers, "Hey, this is what we can do." It's really up to the customer to take those new capabilities and to create their own secret sauce, which is the application layer that sits on our chip. Our value proposition is really about providing the most efficient processing and development platform to enable a lot of different markets.
The current state the answer to the last part of your question is right now we see just incredible breadth of Edge AI opportunities. Some of them I mentioned are very significant today. Some are out in the future, significant ones, again, security market, portable video, and then a variety of different things in automotive.
This GenAI transformer capability is enabling so many other markets to practically just become more intelligent and create an entirely new industry. We see more of the breadth now than that one pipe cleaner, but there will be pipe cleaners in the future. Just not calling out exactly what it will be, but could be something in robotics, could be edge infrastructure, could be both. It's just hard to be precise when you're talking on that now.
Makes sense. Maybe a couple quick hits on other parts of your business. Within enterprise security how would you characterize the demand environment across both enterprise surveillance and consumer?
Yeah. Enterprise security, again, is how Ambarella first came into AI because the value proposition there is so strong for it. That market globally ex China, maybe there's 600-700 million installed base. It's growing at a nice rate with a very strong replacement rate, new product driven cycle caused by AI, which is all CNN today for us. It's all CNN for everybody. CNN in the endpoint is what the market is today, and maybe only 20% of that installed base is converted over to these CNN based cameras.
We see that CNN penetration continuing to rise, creating new product cycles, and we see the Gen AI wave behind it, maybe with products announced this year starting to generate revenue towards the end of this year.
Behind that first CNN wave, then there's the GenAI wave, which comes with a higher ASP for us. This transformer processing is more complex. There's one other thing I'd like to say about the security market, which is our kind of foundational market for Edge AI. Now it's diversified into so many things, but that security market is called physical security, and that continues to be a good growth driver.
However, these cameras, they all have their own IP address. They're plugged into the network frequently with power over Ethernet, and they're starting to be used as a tool by businesses to run their operations more efficiently, whether it's in a retail store or it's a kiosk or it's on a factory floor.
You're starting to see what used to be called physical security or security cameras morph into an entirely new domain, which should cause the growth rate of that installed base to increase so that our business isn't mostly driven by replacement rates, but it's also going to be driven by an acceleration of the installed base as an entirely new category for these products begins to materialize.
It's a very exciting space. Even though the market's been around a long time, it continues to offer very good growth for us this year as well as long term.
Maybe quick hit on auto, 22% of your revenues. I think you're heavily tilted towards kind of safety telematics. Curious, as you think about kind of AI, generative AI, how is that kind of impacting your design wins or your kind of outlook, mix wise across safety, telematics and autonomy?
Same story. It'll be used in certain markets faster than others.
I would say areas like telematics is on a very rapid progression where there's more sources of data coming into our chip and lots of interest in using new types of networks. Today, again, the business is all CNN, but chips like CV75, CV72 give the customer an option to do CNN networks in that design today, but then they can do a software upgrade and just use the transformer capability in those chips. Telematics would be one example, but then you start talking about autonomy. GenAI is critical for that market in terms of being an enabling capability to help autonomous products just do reasoning.
For example, when mentioned navigation and reasoning, but just helping that market really take off.
Where are you, I guess today, within that market?
In auto overall, most of our revenue is in the first category, safety ADAS telematics. Five percent of our revenue is coming from more on the autonomy side. We have commercial truck wins, so very complex systems that go like L4 truck. Like, Kodiak Aurora are some examples of the trucks that we're in. But that's a lower volume high value type of market.
What we don't have on the autonomy side of our automotive business would be passenger vehicles. We have a lot of passenger vehicles in that first bucket I mentioned, but on the autonomy side, we don't have the first big passenger vehicle win yet.
Maybe moving to financial model. I think one of the key aspects to whether it's the investment presentation you have on your website or your discussions at CES, one of the keys is kind of your content story, as CV2 pricing $15-$75 going to CV3, $20-$400. How should we think about kind of the timeframe of that adoption curve of moving up the stack? And how should we think about kind of the impact to gross margins and what that kind of flow-through will look like to earnings and free cash flow?
Yeah. A big part of Ambarella's story has been ASP growth, and we expect that to continue. All of our new products in design, things we haven't announced and things that we're beginning to define all command an ASP way above the $15 that we had for fiscal 2026. Lots of confidence. ASP timing of how that comes into the mix is the more difficult challenge.
Just like this year we're taking a conservative stance until we see more from our customers. On the ASP side lots of confidence. Our customers at the edge are demanding just more and more AI. In applications that used to be single-digit ASPs, they're now buying double-digit ASP parts and asking for more AI 'cause they're using it for so many different features in their systems.
Moving to other parts of the financial model, our long term gross margin guidance is still 59% to 62%. There's no change in that. We are at the low end of the range because in the last year, remember the upside that we delivered, we said, "Look, we'll take more revenue, slightly lower gross margins to drive that positive leverage over this huge investment that we've been making in terms of AI." And that's resulted in our operating margins and earnings coming in better than expected. That's where we're at with the model.
Fantastic. Well, I think we've run out of time.
Thank you.
Thank you very much.
Yeah. Appreciate it.
Appreciate your time.