Ambarella, Inc.

and thank you for standing by. Welcome to Ambarella's Q3 Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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.

Thank you, Daniel, and good afternoon. Thank you for joining our third quarter fiscal year 2025 financial results conference call. On the call with me today is Dr. Fermi Wong, President and CEO, and John Young, CFO. The primary purpose of today's call is to provide you with information regarding the results for our third quarter of fiscal year 2025. The discussion today, the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are based on currently available information and subject to risk. uncertainties, and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We're under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we file with the SEC. Access to our third quarter fiscal 2025 results press release, transcripts, historical results, SEC filings, and a replay of today's call can be found on the investor relations page of our website. The content of today's call as well as the materials posted on our website are Amber Ellis property and cannot be reproduced or transcribed without our prior written consent. Before we start the call, we want to inform you of our plans to participate in the following investor events during the 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 6th, and Needham Growth Conference on January 14th. And of course, we hope to see you during the multiple Cell Site Analyst hosted tours at our CES exhibition January 7th to January 10th in Las Vegas. Fermi will now provide an update for the quarter. John will review the financial results and outlook, then we'll be available for your questions. Fermi?

Thank you, Luis, and good afternoon. Thank you all for joining our call today. Our third quarter revenue was above the high end of our guidance range, increasing about 30% sequentially in both our auto and IoT business. Company-specific factors more than offset the overall weakness in the market, with our strengths originating from our customers' new product reps, especially those incorporating our new higher-priced AI inference processors, such as CV5. We again achieved a record level of AI revenue, which in turn contributed to a higher blended average selling price. We are now forecasting fiscal 2025 revenue to increase by 22 to 24% year over year, versus our prior estimate for revenue growth in the mid to high teens. Last quarter we described our new product momentum as a series of waves, and the next year in fiscal 2026, we expect the first wave from CV5 to continue and be augmented with the commencement of the second wave, CV7. 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 the weakness in the overall market. Our CB3-AD family of SOCs for level two plus and higher level of autonomy represents the third wave with revenue expected to commence in calendar year 2026 or our physical 2027. During the third quarter, we received the first silicon of our CV3-AD655AISOC, which targets advanced level two plus applications, including mass market passenger vehicles, and we are now delivering engineering samples to customers. As you know, the global automotive industry is under significant pressure, so we are proud to forecast our automotive business is expected to grow this year and the next. I would like to remind you our automotive business is comprised of two different business. Our existing ADAS business and our central domain controller business, also known as the CV3 platform. Our existing automotive business, mostly ADAS, with majority now AISOCs, well represent about $80 million this year with an estimated five-year compounded annual revenue growth rate in the meetings. Our CV3 platform targets a much larger but still emerging revenue opportunity, level two plus and high level of autonomy. 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. We remain highly focused on incremental CV3 design wins in an increasingly challenged automotive market. As you know, global vehicle production growth is slow. Level 2 plus market penetration remains in the low single digit. And OEM projects and the software development are delayed. In this environment, we have updated our automotive revenue funnel. As a reminder, our automotive funnel represents a probability weighted estimate of automotive revenue we could generate over the next six years, from fiscal year 2026 to fiscal year 2031. 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. Due to the 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. Notably, we estimate there is about $2 billion not included in the funnel beyond year six, the terminal year of our methodology. We remain optimistic about our long-term secular trend for the level two plus and higher levels of autonomy, and the role that our CV3 platform can serve in this market. We are optimistic because our CV3 platform brings solutions to some of the key challenges automotive OEMs are facing today, including power efficiency, scalability, an open platform with the availability of optimized software IP modules, and a centralized radar. We remain diligent in our efforts to get more CV3 business into the one column. I will now discuss representative customer activity in the quarter. In the automotive market, we highlight new models featuring a variety of advanced safety and automation features. Smart Automobile, a joint venture between Mercedes-Benz and Geely, introduced its Smart Number 5 model in October. This electric SUV features an L2-A-DAS system based on our CV2 with functional safety and is supplied by Tier 1 Aptiv. Xiaopeng, also known as Xpeng, 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. This e-mirror is pre-installed on 100% of the P7 Plus vehicles and start of production commenced in October. Also in the mural 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 murals. This system is based on our CV28. Verizon Auto, a GE brand focused on development and the sales of commercial vehicles, launched its H8R light truck featuring a front ADAS plus driver monitor system based on our CV22AQ. 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. In the enterprise market, Vokada introduces its next generation of cameras, including new 4K dome, fisheye, and PTZ cameras. Based on Embraer's latest CV72, the new camera features advanced analytics, including AI-powered search. Vokada also introduced a new suite of video intercom and an indoor split mini camera, all based on Embraer's CV25. 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. Along.com introduced 5-megapixel and 8-megapixel cloud IP bullet and dome camera based on our CV22. The camera includes onboard recording and advanced analytics. In Japan, iPro, formerly Panasonic Security, announced the addition of 19 new models to its aerial PTZ camera list based on our CV22. We are encouraged to see better the expected adoption of our AI SoC in other IoT markets. While our products frequently target automotive and enterprise applications, our AI SoCs are designed with enough programmability to drive adoption in other IoT markets. For example, Inkstar 360 recently introduced its ACE Pro 2 portable video camera featuring 8K video and 50 megapixel photos. Based on our 5 nanometer CV5, the camera includes gesture and voice control and AI-based highlight assistance. Inkstar 360 also introduced its Lync and Lync 2C AI 4K webcams based on our H22 video processors. Garmin announced its GC245 and 255 HD main marine cameras based on our CV28 and featuring on-screen distance markers and the guidance line to add with both dockings. Grab. A leading technology company based in Singapore, known for its super app providing diversified services, introduced its Katakent 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 edge AI processing. Founded as part 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. 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 HE AI networks such as VLMs, CLIP, and the GenAI. 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 the age. Our strategic plan is well aligned with this and the first wave of new AI product revenue is underway. We expect the second wave to commence alongside the first wave next year with subsequent waves starting calendar 2026 or our fiscal 2027, including the CV3 and our two nanometer platforms. New product success is a key factor in determining our incremental revenue growth next year. We are pleased to return to non-GAAP profitability in Q3. We are highly focused on driving revenue growth and the positive operating leverage on the path to our target long-term non-GAAP operating margin of 30%. We have delivered 15 consecutive years of a positive free cash flow through the year of a fiscal, through the end of fiscal 2024, and we are optimistic our new products can enable us to build upon this positive record. John will now discuss the Q3 result and the Q4 outlook in more detail. John?

I'll now review the financial highlights for the third quarter of fiscal year 2025, ending October 31, 2024. I will also provide a financial outlook for our fourth quarter of fiscal year 2025, ending January 31, 2025. I'll be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, We have eliminated stock-based compensation expense, along with acquisition-related costs and restructuring expense, adjusted for the impact of taxes. For fiscal Q3, revenue was $82.7 million, above the high end of our guidance range, up 30% from the prior quarter, and up 63% year-over-year. Non-GAAP gross margin for fiscal Q3 was 62.6% at the low end of our prior guidance range due to product mix, as we opportunistically drove some revenue upside from certain legacy processors at lower than planned margin. Non-GAAP operating expense was $49.1 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. Q3 net interest and other income was $2.1 million. Q3 non-GAAP tax provision was approximately $200,000. We reported a non-GAAP net profit of $4.5 million, or 11 cents of earnings per diluted share. Now I will turn to our balance sheet and cash flow. Fiscal Q3 cash and marketable securities increased $6.7 million from the prior quarter to $226.5 million. Receivables day sales outstanding increased from 33 days in the prior quarter to 38 days, and days of inventory decreased from 108 days to 94 days. Capital expenditures for tangible and intangible assets were $2.5 million in the quarter and $6.2 million for the nine months ended October 31, 2024. 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. Free cash flow in the quarter was $4.1 million, with year-to-date free cash flow of $2.2 million. 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, came in at 66% of revenue for the third quarter. Ciccone and ODM, who manufactures for multiple end customers, was 11% of revenue for the quarter. I'll now discuss the outlook for the fourth quarter of fiscal year 2025. The continued strength of our customers' new product ramps, especially those enabled by our new product Wave 1 from our 5-nanometer CB5, caused us to increase our Q4 estimates. We are expecting normal seasonal decline in Q4 following the stronger than expected Q3. Fiscal Q4 revenue is expected to be in the range of $76 to $80 million, with IOT and auto both flat to slightly down sequentially. We expect fiscal Q4 non-GAAP gross margin to be in the range of 61.5 to 63%. We expect non-GAAP OpEx in the 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. 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. 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 and wait for your name to be announced. To withdraw your question, please press star 1-1 again. In the interest of time, we ask that you please lend yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Ross Seymour, Deutsche Bank. Your line is open.

Hi, guys. Congratulations on the strong results and guides. I guess my first question for me is really what changed? I know you talked about the different waves and when they're coming, but the inflection point, you know, growing, you know, maybe 5% above the midpoint of your range, but an impressive 30% sequentially, and I know you called January seasonal, but it seems like it's even better than seasonal. So what's the activity at your 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, Q3 result, definitely there is, you know, this 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 after that, it will be our growth of new products. And the Q4 is all about new products growth right now. And in fact, if you look at our run rate of a CVE5, we can look at two different angles. One is from the market angle, that for both auto and IoT growing. And for IoT is really growing at the 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 CVE5. In automotive, 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 start seeing a growth on a 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 the B point 78. So we're still seeing some kind of a seasonality in for Q4.

Well, whatever you're doing, it seems to be working. So congrats on that. I guess for my follow-up, switching over to the automotive funnel, it seems a little bit odd that the number would go down year over year considering you're adding a year where the growth rate at the tail end should be larger. So I guess the big picture question is, to the extent over the last couple of years we've kind of thought as your auto business was going to be the incremental driver of significant growth going forward, now it seems like the IoT, Edge AI, whatever you want to call it, seems to be the bigger driver. Can you just talk about, has the growth profile of the company really switched more to the IoT side? Are you as optimistic as ever on automotive, or is something different the appropriate interpretation we should have?

I think we're still very optimistic about CB3 domain control opportunity in the market. And I would say that if you look at the number, our one column continues to grow, but our pipeline is reduced. 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 similar feedback from everybody. But I think the most important thing for me is the level two plus adoption rate is slower than we expected. We expect to see a lot of engagement. We continue to see a lot of engagement. But a lot of the projects got pushed out into the schedule for different reasons. And some projects even got canceled. So I really think that the level 2 plus adoption is not as fast as we thought. That's probably the reason we start seeing that our funnel is not increasing. However, I still believe that level 2 plus will become an important automotive market for everybody. And that will replace the current level one and level two solution in the market today.

Thank you.

Thank you. Our next question comes from Tori Sponberg with Stifel. Your line is open.

Yes, thank you. And let me echo and say congratulations on the strong results. Fermi, could you just give us a little bit better sense for the mix here between 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.

Right. So maybe let me... put some data together to give you a point how to think about this. First of all, we talk about our AI revenue is roughly 70% in this quarter. And also, we talk about our CV5 easily going to ship more than 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. That gives you an idea of a CV2, our CV2 and CV5 contribution. And also, I want to point out in Q3, this is the first quarter in the last three years that our video processor grow. And that's, I think that's really because that inventory rebound, your inventory correction finish and the customer rebound from there help the video processor has a growth in Q3, but we expect that you will go back to gradually decreasing in the coming quarters.

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 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? That's correct.

We haven't given any guidance on the fiscal year 26, but we do believe that in fiscal year 26, 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.

Thank you. And our next question comes from Quinn Bolton with Niedermann Company. Your line is open.

Hey, guys, let me offer my congratulations again. I wanted to ask Fermi, just kind of coming back to the auto pipeline, maybe sort of follow up to Ross's question. You talked about some push-outs and maybe even cancellations in Level 2+. Do 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 last year's pipeline?

Right. So maybe I'll give you a high-level description. I think in the pipeline, we have one column and the pipeline column. 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. We believe that when we look at the current price delta between level two plus and the level two and level one, we think the price data is still high and that really keep OEM worry about introducing a brand new product in that price point. So I think a lot of OEMs are thinking about how to optimize the price and while introducing a better level 2 plus function features. That's something where we think we can help. Because we keep telling people that, first of all, I think our bond saving for our OEM is significant compared to our competitors. More importantly, our SOFR can be easily adapted from a high end level 2 plus to lower level 2 plus by really with simple modification. And that SOFR compatibility from the low end to high level 2 plus will save a tremendous amount of R&D cost to our customers. So I think we are trying to address the pinpoint of our customer. The reason of today's level 2 plus cost at 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 pinpoint of our customers. Perfect.

And the second question is kind of regarding the automotive pipeline. Geographically, how diversified is that pipeline? Is it pretty concentrated in China or another geography, or do you see pretty good geographic distribution of that pipeline? Thank you.

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 1.5% of our pipeline is from China, and from that you can see that we have probably a little higher percentage in Europe, and that's probably the, and everything else is probably well distributed.

And Quinn, I might add on top of that, our pipeline methodology is really, it was started and designed to focus on L2 plus opportunities. But the pace of adoption in China and the design cycles are very quick relative to the rest of the market. We kind of pegged our six-year cycle to try and be a good proxy for a Western design cycle for models and for programs. And so our six-year funnel I think may not show all of the opportunity in China because those programs in China are quicker. So when Fermi says that the funnel has approximately 15%, that's another factor to consider. Got it. Thank you.

Thank you. Our next question comes from Christopher Roland with Susquehanna. Your line is open.

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 there's a worry that there might be Chinese EV ship ahead in front of tariffs, both EU and US. Do you think that's going to come back to haunt us all in the auto segment at all? Or do you think you're pretty clean from that perspective? Thanks.

Right. So first of all, that exposure I talk about when I answer Quinn's question is about the distribution of our pipeline. It's not about distribution of our current revenue. That distribution of current revenue is quite different than the pipeline. So if I understand your question, you're asking whether we have a lot of exposure on different geographic locations, particular focus on our current revenue. I would say majority of our revenue comes from the US, although it's manufactured in Asia. But the end market, a big portion is the US. And then there are some European markets. Then Japan and Korea are all very big. And in China, again, also 15% of total revenue exposure in China. So that's how our current revenue is distributed based on the geographical locations. And then you asked about the geopolitical situation. My gut feeling is if that situation changes, umbrella is not going to be the only one. will 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 rule is 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. Then we're facing a totally different environment, and then we probably need to write off our 15% total Chinese revenue. But I would say that's not just impact to umbrella, it's impact to the whole industry. For us, I don't think there's anything particularly only target for umbrella in terms of geopolitical risk. 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 target on embryo only.

Thank you. 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 weighed on margins. I wasn't quite sure there but maybe maybe talk about that and and then when we could get a margin lift in particular in you know, next fiscal fiscal year and and what the the moving parts there would be for that gross margin left. Thanks.

Yeah, let me point you to the direction that for example, we did mention our video processor revenue grow in q3. That was the first time for the last 10 years. Although, when we talk about gross margin, we talk about our legacy products. So video processor is part of that, and there are other processors in there. But however, you can see that definitely that's one reason we start feeling a little pressure on the gross margin side. But I will say that the gross margin is really about mix. Every time our mix change, usually you will see our gross margin move up and down a little bit. But like what we have been saying for quarters, we continue to believe that our gross margin will move gradually into our long-term gross margin model, which is 59% to 62%, and it will take time, overtime to get there.

Excellent. Thanks, Fermi.

Thank you. Our next question comes from Kevin Cassidy with Rosenblatt Securities. Your line is open.

Yes, thanks for taking my question. 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?

Yes, thank you. First of all, we already kick off two nanometer projects on our engineering roadmap. and we have engineers working on it, we expect the first two nanometer chip will take about let me say Q4 next year in that period of time. And of course the first chip target is for IoT and our enterprise IoT as well as IoT other section will benefit from this. But of course that Our 2 nanometer is also very important. You should consider our 2 nanometer as a family chip, just like what we did with 5 nano and 10 nano. And for 2 nanometer chip, it's important for us to consider, build up our new technology to address the need of new AI platforms and new AI workload, like GenAI and other type of a transformer network. And we definitely will upgrade our architecture based on two nanometer process node.

OK, great. Sounds exciting. Maybe just from John's point of view, is the OPEX spending for two nanometer as you go through the fiscal year 26?

Yeah. I mean, we haven't given guidance for 26 for OPEX yet. You know, as Fermi said, we're already amortizing the costs for the two-nano project. 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.

Thank you. Our next question comes from David O'Connor with BNP Paribas. Your line is open.

Yeah, great. Thanks for taking my question. Maybe two from my side, if I may. Just firstly, guys, on the autofunnel again, going from that 2.4 down to 2.2, can you kind of break that out, how much was kind of cancelled and then how much was added back in? Um, just to give a sense of kind of the, uh, the relative size of those cancellations, um, and also kind of on those cancellations, anything you can share geographically of where you saw most of those, uh, cancellations and I haven't followed.

Right. So I think the right word to describe that chart, if you look at all of the decrease, the increase is volatile, right? And in fact, It's volatile for reasons that, first of all, a lot of our customers pushing out the project, and some that reduce the forecast, but definitely there are multiple projects that got canceled. Most of the cancellation happens in Europe and in the U.S., and obviously there's definitely projects that can't because So for a reason of other transactions that impacted the roadmap of the company. So I think that definitely plays a big portion of the movement of our pipeline. But I would say that we add a project in there also based on the engagement level 2 plus. So there's plus and minus. But in one column, I want to make clear that, of course, we have new design wins in there that we already announced. There are design wins we haven't announced. But they also, there's the downside is also mainly for a lot of our project that we won last year and the forecast continue being reduced. Some of them reduced by 10%, some of them reduced by even larger margins. So the, that's the combination that we're dealing with in our pipeline.

Thanks for me. That's a, that's really helpful. And just one follow on that, just in China again, you mentioned, I think John mentioned that 16% of sales today And also you said that kind of in the pipeline, it's 15% as well, China. 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 should China land in kind of a steady state in terms of the mix really? Thanks.

Well, first of all, I think John just tried to explain that even we won a design win from China, Because the design cycle usually is two to three years instead of five to six years. So the impact, every Chinese design wing, doesn't matter if it's one or in pipeline, you only occupy three out of six years of that funnel. So that's why, just from that point of view, China represents smaller than the reality. Because all the other projects like U.S. or Europe or even Japan, Korea, usually any design wing is five to six years of pipeline. So I think that's one reason that John tried to say is because of that two to three year design cycle, you make China number smaller than it should be. Thanks, guys.

Thank you. Our next question comes from Suji De Silva with Roth Capital. Your line is up.

Hi, Fermi. Hi, John. So on the L2 Plus winds you have, can you talk about the competitive landscape and your design wind share across those? And I'm curious how impactful the Conti-Bosch partnerships are in helping you secure those winds.

Yeah. So in fact, the competitive landscape didn't change. Outside China, in fact, the worldwide is – NVIDIA, Qualcomm, and Mobileye, and us, the full company. And in China, you have to add the Horizon Robotics in there. So I think those are probably the company we're competing against. And I think Conti and Bosch continue to play a major role. Because right now, with all the OEM design wing outside China, OEMs still want to work with a tier one. Our role to OEN is really providing silicon and sometimes providing sulfur, but they always need a tier one sitting in between so that the county and the board should always play a major role because they are bidding on the design. We are helping them to bid on those designs. So working closely with the tier one continues to be important for us.

Thanks, Fermi. And then my other question is on the customers and helping kind of adoption You said customer software readiness is one of the factors in the timing of adoption. Is there anything you can do from your end to help that equation, help them speed that cycle along with software readiness? Or is that something you just have to have the customer do and then they're ready to adopt you?

Absolutely. That's one thing we really focus on to do. First of all, for example, We already introduced our software stack to many people. And more importantly, we already 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. a quick adaptation from level four to level two plus really help customer to understand using our software they can easily, and also they can of course, they can easily move from level two plus to level three and level four. And that is important because that really significantly reduce their software investment, that's one. Two, we also have a business model to enable our customer by licensing whatever software module they think that they can leverage. For example, we knew that we are doing quite well on the perception side. And we definitely believe that we are one of the few really demoing using HD map to do a perception and driving. And those kind of function features are very welcome. So if any customer wants to use those function features, we are open to license and helping them to integrate to their other software stack. So I think the combination that we have our own software that is scalable from the level 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, Bernie.

Thank you. Our next question comes from Martin Yang with Opco. Your line is open.

Thank you for taking the question. Only one question regarding the automotive pipeline change. Given where you're seeing with European customers and US customers, does it change your outlook for potential margin contribution from those automotive design ones?

Yeah. In fact, we talk about when we go into production with the CV3, our gross margin definitely is going to be in the low end, our long-term gross margin model. So I think that's just because we are competing with the largest possible semiconductor company out there, and we're expecting a steep competition. So that definitely will change. But however, in the short term, I continue to believe that we will maintain our current gross margin model, which is 59% to 62%. And although we are running above it for many quarters now, but we think we're gradually moving down back to that range.

Got it. A quick follow-up. So, again, on broad picture, company-wide margin, do you think, you know, where do you think, what factor would drive margins? Do you think it's mixed 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 go to lower because of mix. But if you look at long-term, I really think that before we hit CV3, we continue to move to our strategy is always try to sell value to our customer. When we move to 5 nanometer, people ask, can you really continue to maintain your gross margin model with a higher cost of the 5 nano? We proved that we can. I think for our current business, particularly current IoT and automotive business, we are quite comfortable about our guidance on the gross margin profile. I think CV3, if you have time to work on it, to work with our supply chain and so on. I will say that I think although we guided lower than our current gross margin, to a low end of our gross margin model, but I still think we have time to work on it.

Thank you, Fermi.

Thank you. Our next question comes from Richard Shannon with Craig Howland. Your line is open.

Thanks for taking my questions as well. 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, I think, just over a year ago, how that's building out here. Maybe if you want to use it in the framework, you're talking about your funnel in the automotive space, talk about it with Gen-AI. I guess I'd love to hear about that.

You know, in the last four quarters, I think it's become very clear to me and to the company, Gen-AI... is going to impact not only just outside our current market. In fact, all our current market will be impacted by GNAI in a different way. In fact, all our customers are looking at how GNAI type of GNAI model going to impact their business. So it's important for us to understand how our customers want and engage with them as early as possible. So we engage with them, start with N1, I would say five, six quarters ago. and we show them what we can do with N1 type of performance, and we're still working with several customers on POC and potentially products. And at the same time, when we realized that our customers, in fact, our current customers told us they need to start looking at GenAI and looking at a clip type of function or other type of large language model to help their business, we start looking at CV72 or CV75 type of product, how does that support our current customer? And frankly, we are very pleased to find out that the chip CV72 and CV75 we defined for the enterprise security business 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. So it definitely helps our customer to start looking at how the clip can run on this kind of edge device in 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. And more on top of that, in fact, a lot of our traditional security camera service providers, for example, those consumer or IoT home suppliers like Ring, like Nest, they just announced that they're going to use GenAI 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. And we think that we can enable similar service at age and significantly reduce the cost of enabling that service. So I think we start seeing a new trend that GenAI is not just for you know, large language model for open AI type of company. In fact, it will come down to apply to all the major company, our current customer, and maybe even other customer we can serve with. So our current talk about GenAI strategy. First of all, we continue to use N1 and the CV7 family to engage customer. We believe we're going to see some of our customer putting a clip type of network into our CV7 family camera 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. But more importantly, I think to address this GenAI platform, I think our two nanometer process is going to play a major role because we believe to solve the GenAI 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.

OK. A lot of detail there for me. I'll follow up with that one a little bit later, but thanks for all that. Thank you. My follow-on question here is, so obviously, as you just detailed in a prior question here about the competitive dynamics here, competitive environment where you're the smallest company out there and probably later to market, what kind of you know it's all the push-outs that we've seen the automotive spaces as exemplified in your funnel change here and you're here is 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 the changes in the environment are going to be beneficial for you well first of all i think that the push like i said the push-outs because one the price need to be right right two

the sulfur needs to be ready. And both of them, I think the market or the current OEMs are definitely looking for both of that. And Embraer definitely have a solution for both. Our bond costs, our low power consumption so we can have a much lower cost on the battery and the power dissipation solution. That definitely helps. The other one is sulfur solution that we think we have a scalable software solution that can easily scale from the 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.

Fair enough. Thank you, Brian.

Thank you.

Thank you. Our next question comes from Gus Richard. With Northland Capital Markets, your line is open.

Yes, thanks for taking my question, and congratulations on the strong results. Just going back to the AI-infused consumer cameras, how much of an ASP uplift would that provide you guys as that capability rolls out?

Right. So, first of all, today our – Our average ASP, the company-wide average ASP, I would say is around $12, $13, and it's continued going up. And going up because our CV2, for example, our CV2 family ASP is around $18, $19. Our CV5, like I said, is anywhere between $25 to $50. And the CV7 is probably somewhere between, CV7 family, let me make clear, is CV75 and CV72. is anywhere between high teens to probably $30, $40. So you can see that the trend is definitely we're building more capability into our chip for AI performance and therefore driving up ASP. So we continue to expect our ASP growth will be there.

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, are you seeing any uptick from your enterprise customers or potentially government entities?

We definitely see that IoT enterprise continues to grow. In fact, we only say that we believe this year, next year, IoT enterprise continues 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.

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.

And I would like to thank everyone to participate today and looking forward to see you on the different roadshow and or CES. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.