Q3 2025 Ambarella Inc Earnings Call
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.
2025 Financial Results Conference Call. On the call with me today is Dr. Fermi Wang, President and CEO, and John Young, CFO.
Louis Gerhardy: The primary purpose of today's call is to provide you with information regarding the results for our third quarter of fiscal year.
Louis Gerhardy: 2025. The discussion today, the responses to your questions will contain forward-looking statements regarding our projected financial results.
Louis Gerhardy: 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.
Louis Gerhardy: 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.
Louis Gerhardy: 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.
Louis Gerhardy: Access to our third quarter fiscal 2025 results, press release, transcripts.
Louis Gerhardy: Historical results, SEC filings, and a replay of today's call can be found on the Investor Relations page of our website.
Louis Gerhardy: The content of today's call, as well as the materials posted on our website, are Amber Ellis' property and cannot be reproduced or transcribed without our prior written consent.
Louis Gerhardy: Before we start the call, we want to inform you of our plans to participate in the following investor events during the fourth quarter. On December 3rd, we will be at the UBS Global Technology and AI Conference.
December 4th at the Wells Fargo TMT Summit.
On December 5th, we'll be hosting BMP's bus tour.
NASDAQ's London conference on December 10th and 11th.
Nomura CES conference on January 6.
Louis Gerhardy: and Needham Growth Conference on January 14th and of course we hope to see you during the multiple cell site analysts hosted tours at our CES exhibition January 7th to January 10th in Las Vegas.
Fermi Wang: 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? Thank you, Louis, and good afternoon. Thank you all for joining our call today.
Fermi Wang: Our third quarter revenue was above the high end of our guidance range, increasing about 30% sequentially in both our auto and IoT businesses.
Fermi Wang: Company-specific factors more than offset the overall weakness in the market, with our strengths originating from our customers' new product ramps, especially those incorporating our new higher-priced AI inference processors, such as CV5.
Fermi Wang: We again achieved the record level of AI revenue which in turn contributed to a higher blended average selling price.
Fermi Wang: We are now forecasting fiscal 2025 revenue to increase by 22 to 24 percent year-over-year versus our prior estimate for revenue growth in the mid to high teens.
Fermi Wang: 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 second wave, CV7.
Fermi Wang: We expect the first 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 a weakness in the overall market.
Fermi Wang: Our CB3AD family of SOCs for level 2 plus and higher level of autonomy represents the third wave with revenue expected to commence in calendar year 2026 or our physical 2027.
Fermi Wang: During the third quarter, we received the first silicon of our CV3-AD655-AISOC, which targets advanced level 2 plus applications, including mass market passenger vehicles, and we are now delivering engineering samples to customers.
Fermi Wang: 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 two different businesses.
Fermi Wang: our existing ADAS business, and our Central Domain Controller business, also known as the CV3 platform.
Fermi Wang: Our existing automotive business, mostly ADAS, with majority now AISOCs, will represent about $80 million this year, with an estimated five-year compounded annual revenue growth rate in the mid-tenths.
Fermi Wang: Our CV3 platform targets a much larger, but still emerging revenue opportunity, level two plus and high level of autonomy.
Fermi Wang: This new opportunity has the potential to significantly accelerate our five-year automotive revenue CAGR beyond the mid-teens CAGR I mentioned for our existing auto business.
Fermi Wang: 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 software development are delayed.
Fermi Wang: 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 six years.
from fiscal year 2026 to fiscal year 2031.
Fermi Wang: At this time, our six-year funnel is approximately $2.2 billion versus $2.4 billion a year ago, with one business representing more than $800 million and a pipeline of more than $1.3 billion.
Fermi Wang: Due to a challenging automotive industry dynamic described earlier, there has been significant volatility in the last years within the funnel as the customer's annual forecast was revised. Projects were delayed or canceled, new projects were added, and the projects were either won or lost.
Speaker Change: Notably, we asked Millers about $2 billion not included in the funnel beyond year 6, the terminal year of our methodology.
Speaker Change: We remain optimistic about our long-term secular trend for the level 2 plus and high levels of autonomy, and the role that our CV3 platform can serve in this market.
Speaker Change: We are optimistic because our CV3 platform brings solutions to some of the key challenges
Speaker Change: automotive OEMs are facing today, including power efficiency, scalability, an open platform with the availability of optimized software IP modules, and a centralized radar.
Speaker Change: We remain diligent in our efforts to get more CB3 business into the one column.
Speaker Change: I will now discuss representative customer activity in a 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 and Geely.
Speaker Change: introduced its Smart Number 5 model in October. This electric SUV features an L2 ADAS system based on our CV2 with functional safety and is supplied by Tier 1 Aptiv.
Xiaopeng, also known as X-Peng.
Speaker Change: An electric vehicle pioneer in China announced the P7 Plus, a mid to full-size electric sedan that utilizes our A12 video processors for the rear-view electronic mirror.
Speaker Change: This e-meter is pre-installed on 100% of the P7 Plus vehicles and start of production commence in October.
Speaker Change: Also, in the mirror market, the joint venture between Honda 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.
Speaker Change: Verizon Auto, a Geely brand focused on development and the sales of commercial vehicles, launched its Shinze H8R light truck featuring a front ADAS plus driver monitor system based on our CV22AQ.
Speaker Change: Turning to our IoT businesses, we are announcing the first customer for our CV7 family, which represents the beginning of the second wave of new product revenue I described earlier.
Speaker Change: In the enterprise market, Vokada introduced its next generation of cameras, including new 4K Dome, Fisheye, and PTZ cameras. Based on Embraer's latest CV72, the new cameras feature advanced analytics, including AI-powered search.
Speaker Change: Wakata also introduced a new suite of video intercom and an indoor split mini-camera, all based on Umbrella CD25.
Speaker Change: Bosch announced its new FlexiDome 8100i dome camera family based on CV22. They feature deep learning-based detection of persons and vehicles even in crowded or congested scenes.
Speaker Change: Along.com introduced 5MP and 8MP cloud IP bullet and dome camera based on our CV22. The camera includes onboard recording and advanced analytics.
Speaker Change: In Japan, iPro, formerly Panasonic Security, announced the addition of 19 new models to its aero PTZ camera list based on LCV22.
Speaker Change: We are encouraged to see better than expected adoption of our AI SoC in other IoT markets.
Speaker Change: While our products frequently target automotive and enterprise applications, our AI SoCs are designed with enough programmability to drive adoption in other IoT markets.
Speaker Change: For example, Insta360 recently introduced its Ace Pro 2 portable video camera featuring 8K video and 50 megapixel photos.
Speaker Change: Based on our 5nm CV5, the camera includes gesture and voice control and AI-based highlight assistance.
Speaker Change: Insta360 also introduced its LINQ and LINQ2C AI4K webcams based on our H22 video processors.
Speaker Change: Garmin announced its GC245 and 255HD marine cameras based on our CV28 and featuring on-screen distance markers and guidance lines to add with boat dockings.
Thank you.
Speaker Change: Grab, a leading technology company based in Singapore, known for its super app providing diversified services, introduced its Kata Cam 2 to collect street view images for map making. Our CV5 supports a full 48-megapixel image sensors to full 360-degree viewing and provides HAI processing.
Speaker Change: 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 that age in both IoT as well as our traditional automotive ADAS market.
Speaker Change: In fact, on a cumulative base, we have now shipped more than 25 million HAI SoCs, and this helps set the table for the introduction of a new higher-value SoC supporting more advanced HAI networks, such as VRMs, CLIP, and the GenAI.
Speaker Change: We believe the significant and continued build-out of AI training and inference capacity in data centers for more and more advanced AI networks is a leading indicator for the secular growth opportunity we see for AI inference processing at that age.
Speaker Change: Our strategic plan is well aligned with this, and the first wave of new AI product revenue is underway.
Speaker Change: We expect the second wave to commence alongside the first wave next year, with a subsequent wave starting calendar 2026 or our fiscal 2027, including the CV3 and our 2-nanometer platforms.
Speaker Change: New product success is a key factor in determining our incremental revenue growth next year.
Speaker Change: We are pleased to return to non-gap 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-gap operating margin of 30%.
Speaker Change: We have delivered 15 consecutive years of a positive free cash flow through the year of a fiscal, through the end of fiscal 2024, and we are optimistic our new products can enable us to build upon this positive record.
Speaker Change: John will now discuss the Q3 result and the Q4 outlook in more detail. John.
John Young: I'll now review the financial highlights for the third quarter of fiscal year 2025, ending October 31st, 2024. I will also provide a financial outlook for our fourth quarter of fiscal year 2025, ending January 31st, 2025.
John Young: I will 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.
John Young: adjusted for the impact of taxes. For fiscal Q3, revenue was $82.7 million above the high end of our guidance range, up 30% from the prior quarter, and up 63% year-over-year.
John Young: 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.
John Young: Non-GAAP operating expense was $49.1 million, 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.
John Young: Q3 net interest and other income was $2.1 million. Q3 non-GAAP tax provision was approximately $200,000.
John Young: We reported a non-gap net profit of $4.5 million or 11 cents of earnings per diluted share.
John Young: Now, I will turn to our balance sheet and cash flow.
John Young: Fiscal Q3 cash and marketable securities increased $6.7 million from the prior quarter to $226.5 million.
John Young: 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.
John Young: Capital expenditures for tangible and intangible assets were $2.5 million in the quarter and $6.2 million for the nine months ended October 31st, 2024.
John Young: We generated positive operating cash flow of $6.6 million in the quarter and $8.4 million through the first three quarters of fiscal 2025.
John Young: Free cash flow in the quarter was $4.1 million, with year-to-date free cash flow of $2.2 million.
John Young: We had two 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.
John Young: came in at 66% of revenue for the third quarter. Ciccone, an ODM who manufactures for multiple end customers, was 11% of revenue for the quarter.
John Young: I'll now discuss the outlook for the fourth quarter of fiscal year 2025.
John Young: The continued strength of our customers' new product ramps, especially those enabled by our new product Wave 1 from our 5-nanometer CV5, caused us to increase our Q4 estimate.
John Young: We are expecting normal seasonal decline in Q4 following the stronger-than-expected Q3.
John Young: Fiscal Q4 revenue is expected to be in the range of $76 to $80 million, with IOT and auto both flat to slightly down sequentially.
John Young: We expect fiscal Q4 non-gap gross margin to be in the range of 61.5 to 63 percent.
John Young: We expect non-GAAP OPEX in the fourth quarter to be in the range of $49 to $52 million, with the increase compared to Q3 driven by CES marketing activities, increased headcount, and project-related engineering expenses.
John Young: We estimate net interest income to be approximately $1.8 million, our non-GAAP tax expense to be approximately $600,000, and our diluted share count to be approximately 41.8 million fully diluted shares.
Speaker Change: Thank you for joining our call today and with that I will turn the call over to the operator for questions. As a reminder to ask a question please press star 1 1 on your telephone.
Speaker Change: and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker Change: In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster.
Speaker Change: and many more. Thank you for watching. We'll see you next time.
Speaker Change: Our first question comes from Ross Seymour with Deutsche Bank. Your line is open.
Ross Seymour: Hi guys, congratulations on the strong results and guide. I guess my first question for me is
Ross Seymour: 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.
Ross Seymour: I know you called January seasonal, but it seems like it's even better than seasonal.
Speaker Change: What's the activity at your customers 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?
Thank you, Ross. I think, first of all...
Speaker Change: Q3 results, definitely there is, you know, the first quarter we rebound from the inventory correction. So when we talk about last quarter, we did talk about, you know, 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 Q4 is all about new product growth right now.
Speaker Change: And in fact, if you look at our run rate of CVE-5, we can look at two different angles. One is from the market angle, that for both auto and IoT growing.
Speaker Change: And for IoT, it's really going at IoT Enterprise as well as IoT Other. These two categories, they both grow in a similar rate. And the major driver is that new product cycle for CP5.
In automotive,
Speaker Change: market, that you see that we talk about new customer, like Sensara with CV22 and Rivian 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 the slashing growth on new product line, and in Q4, it's all secular about our growth. But I also want to point out our Q3 is at 82 point something million dollars revenue, and the Q4 guidance in a B.78, so we're still seeing some kind of seasonality.
infoq4.
But whatever you're doing, it seems to be working.
Great.
Speaker Change: 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 the tail end should be larger.
Speaker Change: 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
Speaker Change: 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.
Speaker Change: I think, you know, we're still very optimistic about CB3 domain control opportunity in the market.
Speaker Change: And I would say that if you look at the number, our one column continues to grow, but our pipeline is reduced.
Speaker Change: The reason for that is really that, first of all, the overall market is weak, particularly automotive market. And I think that you can get that same feedback from everybody. But I think the most important thing for me is the level 2 plus adoption rate is slower than we expected.
Thank you very much.
Thank you.
Speaker Change: Thank you. Our next question comes from Tore Svanberg with Stiefel. Your line is open.
Speaker Change: CV2, CV5. I mean, I assume not a whole lot of CV7 revenue yet. I think, you know, in the last call, I think you talked about CV5, you know, potentially, you know, reaching a million units this year. So any more color you can share with us on the mix of CV would be helpful.
Speaker Change: Right, so maybe let me put some data together to give you some points on how to think about this. First of all, we talk about our AI revenue is roughly 70 percent.
in this quarter.
Speaker Change: And also we talk about our CV5, easily we're going to ship more than a million units, we're probably north of that by a margin. So that CV5 doing well. And our CV5 ASP is anywhere between $25 to $50.
Grohl.
Speaker Change: 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 it will go back to decreasing, gradually decreasing in the coming quarters.
Speaker Change: Great and that was actually going to be my follow-up question. So as we think about fiscal 26 and we think about the cyclical recovery and so on and perhaps even impact the gross margin, so you know 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 26.
Speaker Change: That's correct. We haven't given any guidance on the fiscal year 2026, but we do believe that in fiscal 2026, both IOT and OTO will grow, and we'll provide more details about the gross margin and the APEX in the next conference call.
Sounds good. Congrats again, Fermi. Thank you.
Speaker Change: Thank you. And our next question comes from Quinn Bolton with Needham & Company. Your line is open.
Quinn Bolton: Hey you guys, let me offer my congratulations again. I wanted to ask Fermi, just kind of coming back to the auto pipeline, maybe sort of a follow-up to Ross's question. You talked about some pushouts and maybe even cancellations in level 2+.
Quinn Bolton: 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? Right. So maybe I'll give you a high-level description. I think
Speaker Change: In the pipeline, we have one column and also—sorry, in the funnel, we have one column and the pipeline column.
Speaker Change: And in one column, I would say CV3 percentage is below 50%, but in the pipeline column, CV3 domain control is way above 50% in that pipeline. So in terms of Level 2+, maybe I'll add a little more color on that.
Speaker Change: We believe that when we look at the current price delta between level 2 plus and level 2 and level 1, we think the price delta is still high, and that really...
Speaker Change: Keep OEM worried 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...
Speaker Change: First of all, I think our bond saving for our OEN is significant compared to our competitors. More importantly, our SOFR can be easily adapted from a high-end Level 2 Plus to a low-end Level 2 Plus by really with a simple modification. And that SOFR compatibility from a low-end to a high-end Level 2 Plus...
Speaker Change: The reason of today's level 2 plus cost delay, one is the cost, the other one is really the software development. That's why we think we have a solution that we can address the pain points of our customers.
, , ,
Speaker Change: Perfect. And the second question is kind of regarding the automotive pipeline.
Speaker Change: 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. I think the distribution is pretty fair. In fact, a lot of people think we have a high concentration in China, which is wrong. I would say that 15% of our pipeline is from China, and from that you can see that we have a little higher percentage in Europe, and everything else is probably well distributed.
Speaker Change: You know, it was started and designed to focus on L2 plus opportunities.
Speaker Change: 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 six-year cycle to try and be a good...
proxy for a Western design cycle for, you know, models.
Speaker Change: and for programs and so our our six-year funnel I think may not show all of the opportunity in China because those those programs in China are are quicker so
Speaker Change: You know, when Fermi says that the funnel has, you know, approximately 15%, that's another factor to consider.
Got it. Thank you.
Thank you. Thank you. Thank you.
Speaker Change: Thank you. Our next question comes from Christopher Rolland with Susquehanna. Your line is open.
Speaker Change: Hey, thanks for the question. And yeah, 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, you know, those with, I guess, EU exposure in particular?
And then, just tying into this as well, there's a...
Speaker Change: There's a worry that there might be Chinese EV ship ahead in front of tariffs, both EU and U.S. Do you think?
Speaker Change: Do you think you're pretty clean from that perspective? Thanks. Thanks. Right. So first of all, that exposure I talk about when I answer Quinn's question is about
Speaker Change: The distribution of our pipeline is not about distribution of our current revenue.
Speaker Change: That distribution of current revenue is quite different than the pipeline.
Speaker Change: So, if I understand your question, you are asking whether we have a lot of exposure on different geographic locations.
Speaker Change: Particular focus on our current revenue, I would say the majority of our revenue is coming from the U.S. All those manufacturing in Asia, but the end market, a big portion is the U.S.
Speaker Change: And then there are some European markets, 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 changed...
Speaker Change: And Burela is not going to be the only one. Maybe we'll probably have some impact, but not the biggest impact. However, this is going to change. If the geopolitical situation continues to get worse, which I think will, it really depends on how much more tightened the rules are going to be. And the worst situation, of course, is that the whole supply chain gets separated, that the U.S. component cannot go into China and vice versa.
Speaker Change: Then we're facing a totally different environment, and then we probably need to write off our 15% total Chinese revenue.
Speaker Change: I would say that's not just an impact to Umbrella, it's an impact to the whole industry. For us, I don't think there's anything particularly only targeted for Umbrella in terms of geopolitical risk.
Speaker Change: You know, in the past, we had a lot of risk with Hikvision, Dahua, that was four 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.
Targeted on Embraer only.
Speaker Change: 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
Speaker Change: Sure, there, but maybe talk about that and then when we could get a margin lift in particular in, you know, next fiscal year and what the moving parts there would be for that gross margin lift.
Speaker Change: Yeah, 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.
Speaker Change: Although, when we talk about gross margin, we talk about, you know, our, you know, our
Speaker Change: What's the word we use? Legacy. Legacy products. So video processor is part of that, and there are other processors in there. However, you can see that definitely that's one reason we start feeling a little pressure on the coarse margin side.
Speaker Change: But I will say that the growth margin is really about mix.
Speaker Change: Every time our mix changes, usually you will see our gross margin move up and down a little bit.
Speaker Change: But like what we have been saying for quarters, we continue to believe that our growth margin will move gradually into a long-term growth margin model, which is 59 to 62 percent, and it will take time, over time, to get there.
Excellent. Thanks, Fermi.
Thank you. Thank you.
Speaker Change: Thank you. Our next question comes from Kevin Cassidy with Rosenblatt Securities. Your line is open.
Speaker Change: Yes, thanks for taking my question and maybe a slightly different subject. Can you talk more about your two nanometer development? When do you expect tape out and the target end markets for those products?
Speaker Change: Yes, thank you. First of all, we only kick off two nanometer projects, and it's on our engineering roadmap, and we have engineers working on it. We expect the first two nanometer chip will tape out
Speaker Change: Let me say Q4 next year, in that period of time. And of course, the first shift target is for IoT, and our enterprise IoT as well as IoT other section will benefit from this.
Speaker Change: But of course, that 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...
Speaker Change: the need of new AI platforms and new AI workloads like GenAI and other types of transformer networks. And we definitely will upgrade our architecture based on our 2-nanometer process node.
Speaker Change: Okay, great. Sounds exciting. Maybe just from John's point of view, is the op-ex include all the spending for 2 nanometer as you go through the fiscal year 26?
Speaker Change: Yeah, I mean, we haven't given guidance for 26 for OPEX yet, but as Fermi said, we're already amortizing the cost for the 2-nano project.
Speaker Change: So, you know, I think OPEX, I would expect OPEX to increase as a, you know, just absolute number next year, but the two nano project is already baked into the run rate.
Okay, great. Thanks. Congratulations.
Thank you.
Speaker Change: Thank you. Our next question comes from David O'Connor with BNP Paribas. Your line is open.
Speaker Change: Yeah, great, thanks for taking my question. Maybe two from my side, if I may. Just first, you guys on the autofunnel again.
And going from that 2.4...
...down to 2.2. Can you...
Speaker Change: kind of break that out, how much was kind of cancelled and then how much was added back in just to give a sense of kind of the 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 haven't followed
Speaker Change: Right. So, I think the right word to describe that chart, if you look at all of the decrease and 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.
Speaker Change: and some that reduce the forecast, but definitely there are multiple projects that got canceled. The most cancellation happens in Europe and in the U.S.
And obviously, there is definitely a project at hand because...
Speaker Change: So for a reason of other, you know, transactions that impacted the roadmap of the company. So I think that definitely is a big portion of the movement of our pipeline.
Speaker Change: But I would say that we add a project in there also based on the engagement level two plus. So there's a plus and minus.
Speaker Change: But in one column, I want to make it clear that, of course, that we have new design wins.
Speaker Change: are in there that we already announced. There's design we haven't announced. But the downside is also mainly for a lot of our projects that we won last year, and the forecast continues being reduced. Some of it's reduced by 10%. Some of it's reduced by even larger margins. So that's the combination that we're dealing with in our pipeline.
Speaker Change: And also you said that in the pipeline, it's 15% as well, China.
Speaker Change: but then you know China's 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?
Speaker Change: Thanks. Well, first of all, I think John just tried to explain that even we won a design win from China.
Speaker Change: because the design cycle is usually 2 to 3 years instead of 5 to 6 years.
Speaker Change: Every Chinese design wing, it doesn't matter if it's one or in pipeline, it only occupies three out of six years of that funnel. So that's why, just from that point of view, China represents
Boss
Speaker Change: the smaller than the reality. Because all the other projects like US, or Europe, or even Japan, Korea, usually any design win is a five to six years of pipeline. So I think that's one reason, as John tried to say, is because of that two to three year design cycle, you make China's number smaller than it should be.
and many more. Thank you.
Thanks, guys.
Thanks for watching!
Speaker Change: Thank you. Our next question comes from Suji Da Silva with Roth Capital. Your line is in line.
Speaker Change: Hi Fermi, hi John. 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 Conti-Bosch partnerships are in helping you secure those wins.
Yeah, so in fact the competitive landscape even changed.
Speaker Change: Outside China, in fact, the worldwide is NVIDIA, Qualcomm, and Mobileye, and us, right, the four companies. And in China, you have to add the Horizon Robotics in there. So I think those are probably the companies we're competing against.
Speaker Change: And I think Conte and Bosch continue to play a major role, because, you know, right now with all the OEM design wing,
I'll say China.
Speaker Change: OEN still wants to work with a Tier 1. Our role to OEN is really providing silicon and sometimes providing sulfur, but they always need a Tier 1 sitting in between, so that the county and the board should always play a major role because they are beating on the design. We are helping them to work out, to beat on those design. So working closely with a Tier 1 continues to be important for us.
Thanks, Fermi.
Speaker Change: 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 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?
Speaker Change: Absolutely, that's one thing we really focus on to do. First of all, for example,
Speaker Change: We already introduced our software stack to many people, and more importantly, we already showed some of our important customers that using our software stack, which is designed for level 4, we can easily, in less than two months, adopt it.
to the Level 2 Plus type of sensor configuration.
our customer by licensing whatever software module they think.
that we, that they can leverage.
Speaker Change: For example, we knew that we are doing work quite well on the perception side.
Speaker Change: And we definitely believe that we are one of the few really demoing using HDMAP, instead of HDMAP to do perception and driving.
Speaker Change: And those kind of function features are very welcome. So we are helping out. If any customer wants to use those function features.
Speaker Change: 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 level two to level four, 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.
Okay, thanks very much.
Speaker Change: Thank you. Our next question comes from Martin Yang with Opco. Your line is open.
Martin Yang: 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,
Speaker Change: Yeah, in fact, you know, 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.
Speaker Change: 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 percent, and although we are running above it for many quarters now, but we think we're gradually moving down back to that range.
Speaker Change: Got it. A quick follow-up. So, again, broad picture, company-wide margin.
Speaker Change: Do you think, you know, where do you think, what factor would drive the margins? Do you think it's mixed?
Speaker Change: Or, you know, any other factors you would point out that have a bigger influence on the long-term margin outlook? Yeah. So, if you look at only short-term quarter-to-quarter, mix is the only reason. Every quarter when our product mix that we sell differently, that changes our gross margin. You see that in Q3, gross margin goes to lower because of mix.
Speaker Change: But if you look at it long-term, I really think that before we heard his CB3...
Speaker Change: We continue to move to, our strategy is to always try to sell value to our customers.
Speaker Change: And when we move to, you know, 5 nanometer, people ask,
Speaker Change: really continue to maintain your growth margin model with a higher cost of the financial.
Speaker Change: And we prove that we can. So I think for our current business, particularly current IoT and automotive business.
Speaker Change: We are quite comfortable about our guidance on the gross margin profile. But I think CB3, if we have time to work on it, to work with our supply chain and so on, so I would 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.
Thank you, Fermi.
Speaker Change: Thank you. Our next question comes from Richard Shannon with Craig Hallam. Your line is open.
Well, thanks for taking my questions as well.
Speaker Change: We haven't had a lot of discussion on Gen AI in this call, so maybe Fermi, if you can talk about the progress here since you announced this initiative just over a year ago, how that's building out here. Maybe if you want to use it in the framework you were talking about your funnel in the automotive space, talk about it with Gen AI, I guess I'd love to hear about that.
Fermi Wang: In the last four quarters, I think it's become very clear to me and to the company, GAI is going to impact not only just
Thank you very much.
Fermi Wang: to understand what our customers want and engage with them as early as possible. So we engage with them, start with N1, I would say six.
Fermi Wang: five, six quarters ago. And we showed them what we can do with one type of performance. And we're still working with several customers on POC and potentially products.
Fermi Wang: And at the same time, when we realized that our customers, in fact, our customers, current customers, told us they need...
Fermi Wang: to start looking at Gen-AI and looking at the 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.
Fermi Wang: can be used to run a large language model, although it's not large, but it's a 3 billion per meter clip type of neural network, and any derivative of that.
Fermi Wang: So, it definitely helps our customers to start looking at how the clip can run on this kind of H-device, the camera. We're talking about a 5-watt chip running at 3 billion parameters, which is very difficult to find in the market today.
Fermi Wang: And more on top of that, in fact, a lot of our traditional
Fermi Wang: security camera service provider. For example, those consumer or IoT home suppliers like Ring, like Nest.
Fermi Wang: They just announced that they're going to use a Gen-AI type of service. In fact, they all announced running CLIP type of a neural network on the server. And they charge a customer $10 a month.
Fermi Wang: And we think that we can enable similar service at age and significantly reduce the cost of enabling that service. So I think...
Fermi Wang: We start seeing a new trend that Gen AI is not just for, you know, a larger language model for open AI type of company. In fact, it will come down to apply to all the major...
Fermi Wang: Come with our current customer and maybe even other customer we can serve with
Fermi Wang: sometime next year, and that will be the first revenue from CV7, and we believe 2026, we're going to see some revenue as we expected.
Fermi Wang: But more importantly, I think to address this AI platform, I think our two nanometer process is going to play a major role because we believe...
Fermi Wang: To solve the chain AI in an 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.
Speaker Change: 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. A follow-on question, my follow-on question here is...
Speaker Change: 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 in the market.
Speaker Change: What kind of, you know, with all the push-outs that we've seen in the automotive space, as exemplified in your funnel change year and year here, do you think this is going to end up being a net positive for you, allowing you to catch up in any manner? Maybe just kind of discuss how these changes in the environment are going to be beneficial for you.
Speaker Change: Well, first of all, I think, like I said, the push-out is because, one, the price needs to be right. Right? Two, the software needs to be ready. And both of them, I think the market or the current OEMs are definitely looking for both of that.
Speaker Change: And Embraer definitely have a solution for both. Our bunk costs, our low power consumption, so we can have a much lower cost on the battery and the power dissipation solution. That definitely helps.
Speaker Change: The other one is software solution. We think we have a scalable software solution that can easily scale from level two to level four. I haven't seen, you know, we definitely believe that also is helpful. So I won't 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.
Thank you. Thank you.
Fair enough. Thank you, Brian. Thank you.
Speaker Change: Thank you. Our next question comes from Gus Richard with Northland Capital Markets. Your line is open.
Speaker Change: Yes, thanks for taking my question and congratulations on the strong results. Just going back to the AI and Q's consumer cameras, you know, how much of an AST uplift would that provide you guys as that capability rolls out?
Right. So, first of all,
Speaker Change: Today, our average ASP, the company-wide average ASP, I would say is around $12, $13, and it continues going up.
Speaker Change: And going up, because our CV2, for example, our CV2 family ASP is wrong.
Speaker Change: $18, $19, our CV5, like I said, anywhere between $25 to $50.
Speaker Change: 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.
Speaker Change: Got it. And then just given the change in administration, securing the border, you know, deporting 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, you know, are you seeing any uptick from your enterprise customers or potentially government entities?
Speaker Change: We definitely see that IOT enterprise continue to grow. In fact, we only say 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.
Got it. Thanks so much. Thank you.
Speaker Change: 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: And I would like to thank everyone to participate today. I'm looking forward to see you on a different road show and or CES. Thank you very much.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.
Thanks for watching.