Ambarella, Inc.

Hello, everyone, and welcome to Ambarella's first quarter fiscal year 2026 earnings 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 participate, you will need to press star 1-1 on your telephone, and you will hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please note, this event is being recorded. Now it's my pleasure to turn the call over to the Vice President, Corporate Development, Lewis Gerhardy. The floor is yours.

Thank you, Carmen. Good afternoon, and thank you for joining our first quarter fiscal year 2026 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 first quarter of fiscal year 2026. The discussion today and 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 are 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. Before starting the call, I'd like to summarize our investor events scheduled for our second fiscal quarter. On June 3rd, we'll be participating in Bank of America's Technology Conference in San Francisco. June 17th, we'll host Redburn Atlantic's West Coast Bus Tour in Santa Clara. June 18th, we'll host Trivariate Research and NH Investment Securities Bus Tour in Santa Clara. And June 23rd to 25th, we'll be visiting Baltimore, Boston, and New York City on a non-deal roadshow. Access to our first quarter fiscal year 2026 results press release, transcripts, historical results, and SEC filings as well as 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 Amaral's property and cannot be reproduced or transcribed without our prior written consent. Fermi will now provide a business 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 for joining us for our call today. We had an excellent start to the year with the first quarter revenue of $85.9 million in the upper half of our guidance due to the continued strength in our HAI business. Both our 5-nanometer CV5 and CV7 product family as well as our 10-nanometer CV2 product families contributed to the revenue growth and our average selling price. continue to increase as we capture more value per design win. Ag AI revenue, which we define as a product that integrates one of our proprietary deep learning AI accelerators, was more than 75% of our Q1 revenue, and this represents the fourth consecutive quarter of regular AI revenue. This achievement demonstrates the execution of our Ag AI strategy in the face of volatile market. During the first quarter, IoT applications increased in the single digits sequentially and now represent about three quarters of our total revenue. With our automotive business declined low single digits sequentially, although automotive revenue was up more than 20% on a year-over-year basis. In our February 26th earning call, we provided a fiscal 2026 revenue growth estimate in the mid to high teens of approximately $327 million to $339 million, with some conservative building to our second half outlook due to the geopolitical uncertainty. Although the geopolitical uncertainty remains high, we are increasing our fiscal 2026 revenue growth estimate to the range of 19% to 25%, or approximately $348 million at the midpoint. While we continue to expect that we will not face a material direct impact from the current tariffs, given the uncertainty of an indirect impact, our larger than normal range of guidance reflects our conservatism. We are confident in the long-term drivers of our HAI strategy, and the business remains fully intact. Multiple factors are driving our optimism for the HAI market. including my recent discussions with customers, the representative customer engagements I will discuss later in the call, as well as evolution of our HAI serviceable available market. Our SAM is comprised of more than 20 different automotive and IoT HAI applications with a five-year compounded annual revenue growth rate in the high teens, reaching almost $13 billion in fiscal 2031. In the past, a vast majority of our revenue and our SAM opportunity originated from the edge endpoint market or the terminal device in a network. But our new analysts indicate SAM expansion in the edge infrastructure or the layers of a network where data from multiple endpoints is aggregated and the incremental advanced AI features and the services such as a multi-modal vision language and reasoning models can be supported. We are already addressing the edge infrastructure market with the N1 family, and we are now developing a new AI-associated product family to enhance our edge AI infrastructure roadmap. By leveraging the silicon architecture and software investment in our low-power and scalable third-generation AI accelerator, we are able to efficiently extend our reach. Over the next few quarters, we will be describing some of the Edge infrastructure applications we are targeting in more detail. In April, I attended the IAC West security show and met with key customers and partners. And Varela demonstrated its leadership in JNAI as of the Edge with 18 product demonstrations including the latest Gen AI and the Vision AI capabilities. And I was very pleased with the high level of customer interest and design activities around our advanced AI products. The demonstrations highlight Umbrella's ability to enable scalable, high performance reasoning and the Vision AI applications, leveraging our third generation AI accelerator, which now supports most of the leading Gen AI models from 500 million to 34 billion parameters. We demonstrated deep-seq GNA models running on all products at the three different price performance points, including CV75, CV72, and N1655 processors. This demo, including advanced multi-string video analysis, exemplifies how we are pushing the boundaries of real-time AI-powered security and analytics by running state-of-art vision language models for both endpoints and on-prem infrastructure. I will now talk about some of our customer product introductions during the quarter. During the quarter, leading enterprise security camera company introduced two new products based on our CV72, offering very high resolution and advanced AI analytics. A third product, a wearable device supporting multiple modalities, was also introduced to the market, and this first-of-a-kind product is based on our H6LM video processor. As I described earlier, we are seeing increased traction in the HAI market beyond our core enterprise and home security business. This quarter, IoT Edge examples that demanded demanding our AI technology, including 360-degree portable video cameras, cyclist cameras, industrial automation, and enterprise video conferencing. In the portable video camera market, market leader Insta360 introduces a flagship model, the 360-degree X5 camera. Based on umbrella's 5-nanometer CV5, the X5 offers 8K video, with advanced AI-based image processing. Also in the IoT market, Garmin announced its VariaView Halide camera for cyclists based on our H32 video processors. In the enterprise IoT industrial automation market, Huawei announced its R5000 series of machine vision code readers based on our third generation AI accelerator. The 5-nanometer CV75 enables the system to read up to 90 codes per second. Also in the enterprise IoT, Norway-based Hadley introduced a new category of multi-camera video conferencing products as an integrated system Europe exhibition. Hadley's new C1 video bar is part of a collaboration with technology giant Lenovo. And the advanced system is based on our 5 nanometer CV72 with 20 times the AI performance of previous generation systems. In our automotive safety and ADAS business, this quarter we are disclosing wings in China, Japan, Korea, and the US. A leading Japanese OEM will utilize our CV25 SOC in a data location application with a CV25 supporting both human viewing and data analytics. The project is supported by a major T01 in Japan, with production scheduled to begin this year. Also in Japan, another leading Japanese OEM is utilizing CB25 for a multi-camera system providing in-cabin recording and viewing functions, with production scheduled for our current fiscal year. During the second quarter, ZKER introduced its 007 GT electric vehicle featuring an interactive intelligent B-pillar system with two cameras. Our CV-28 enables access control based on face ID as well as in-cabin monitoring. Thinkware, a leading South Korea provider of smart car information technologies, has entered production with Harmony, a dual-camera recorder based on CV-25 supporting ADAS features such as full collision warning, land departure warning, and security monitoring. And in the commercial fleet telematics market, U.S.-based Royal Easy introduces RZ-1 feature in the dual-view camera based on our CV-25. The RZ-1 captures clear road and cabin footage to improve fleet safety and accountability with integrated HAI identifying risks like distracted driving, phone usage, or tailgating. As you can see from this representative engagement, security remains an important growth market for us, but we are seeing opportunities in numerous other AG AI applications with customers in both the auto and the IoT market evaluating and adopting our AI SOCs. As many of you know, roughly five years ago, AG AI originated in an enterprise security camera market, and we were quick to leave the market. Today, we continue to lead a security-age AI market, and we are successfully leveraging our AI portfolio and the market know-how into new application verticals. In fact, security is less than half of our total revenue today, and today's announcements are just a subset of new-age AI applications we see emerging. Our investment in technology and products is driving today's revenue growth and our future revenue growth opportunities. Our edge AI products address the mega trends of safety and security, but also automation which enables end user productivity to be improved and or enables entirely new revenue streams across many markets. While it is still early, AI is fighting its way to the edge. It's not just a data center or hyperscaler opportunity anymore. And we are the leader in HAI with more than 32 million HAI processors shipped on a cumulative basis. We are the established HAI technology provider which uniquely focus on focus and the position for the rapidly evolving HAI market. We continue the pace of rapid innovation. Our product portfolio and the roadmap are highly differentiated and offer the flexibility and scalability to target increasingly diverse applications, both enterprise and consumer-driven markets, and across each endpoint as well as each infrastructure. As I wrap up today, I want to reiterate the important points we shared today. One, we deliver strong Q1 results with similar strengths projected into Q2. We increase our fiscal 2026 guidance while maintaining a conservative second half stance. Three, our higher value, higher ASP products are seeing strong momentum. Four, we have a strong SAM outlook with the new AGI markets in development. Five, we are the established AGI market leader who is competing at the right pace. Of course, the geopolitical uncertainty can be a distraction, But to deal with it, I feel it is important to remain agile and to be prepared for short-term surprises and to focus on what we can control. While most importantly continuing investment in innovation and market development, that is most critical for our success. Financially, while we have generated positive free cash flow for 16 consecutive years, our goal is to develop the technology products and the customers that result in positive earning leverage and growth in our free cash flow. With that, John will now discuss the Q1 results and the Q2 outlook in more detail.

Thank you, Fermi. I'll now review the financial highlights for the first quarter fiscal year 2026, ending April 30th, 2025. I will also provide a financial outlook for our second quarter of fiscal year 2026, ending July 31, 2025. 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. For non-GAAP reporting, we have eliminated stock-based compensation expense along with acquisition-related costs adjusted for the impact of taxes. For fiscal Q1, revenue was $85.9 million, above the midpoint of our prior guidance range, up 2.2% from the prior quarter, and up 57.6% year over year. Sequentially, automotive revenue declined in the low single digits, and IoT increased in the mid-single digits. Non-GAAP gross margin for fiscal Q1 was 62%. slightly above the midpoint of our prior guidance range due to a favorable product mix. Non-GAAP operating expense in Q1 was $51.8 million, slightly above the midpoint of our prior guidance range of $50 to $53 million, due in part to higher engineering costs on new and existing chip development projects. Q1 net interest and other income was $2.2 million. Comparing to our prior guidance of $1.8 million, the increase was primarily from higher other income. Q1 non-GAAP tax provision was approximately $600,000. We reported a non-GAAP net profit of $3 million or 7 cents of earnings per diluted share in Q1. Now I will turn to our balance sheet and cash flow. Fiscal Q1 cash and marketable securities reached $259.4 million increasing $9.1 million from the prior quarter and $56 million from the same quarter a year ago. Increased cash and marketable securities benefited primarily from working capital improvements associated with increased revenue during the quarter. Receivables day sales outstanding decreased from 33 days in the prior quarter to 31 days, while days of inventory increased one day to 98 days. Compared to the prior quarter, our inventory dollars increased 14% to support our customers' strong demand outlook for our products. Operating cash inflow was $14.8 million for the quarter. Capital expenditures for tangible and intangible assets were $4.6 million for the quarter. Free cash flow was $10.2 million for the quarter. During the second quarter of fiscal year 2026, Umbrella's board of directors approved an extension of the current share repurchase program for an additional 12 months ending June 30th, 2026. During the first quarter, we purchased 24,152 shares of our stock for total consideration of approximately $1 million. As of today, there's approximately $48 million available under our repurchase authorization. We had one logistics company representing 10% or more of our revenue. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 63.1% of revenue for the quarter. I'll now discuss the outlook for the second quarter of fiscal year 2026. Demand for our edge AI inference processors remains strong. We anticipate fiscal Q2 revenue in the range of $86 million to $94 million, or $90 million at the midpoint. We expect mid-single-digit sequential revenue growth in IoT applications, with auto revenue expected to be slightly up versus the prior quarter. For fiscal 2026, we anticipate a revenue growth range of 19% to 25%. We expect fiscal Q2 non-GAAP gross margin to be in the range of 60.5% to 62%. We expect non-GAAP operating expenses in the second quarter to be in the range of $52.5 to $55.5 million, with the increase compared to Q1 driven by new product development costs, including a new AISOC addressing the emerging IoT edge infrastructure opportunities described earlier by Fermi. We also anticipate a weaker U.S. dollar to have a moderately unfavorable impact on our operating expenses in the second quarter. We estimate net interest and other income to be approximately $1.8 million, our non-GAAP tax expense to be approximately $800,000, and our diluted share count to be approximately 42.6 million shares. Thank you for joining our call today. And with that, I will turn the call over to the operator for questions.

Thank you so much. And as a reminder, that is star 1-1 if you do have a question and wait for your name to be announced. To remove yourself, press star 1-1 again. One moment for our first question. It comes from the line of Christopher Roland with Susquehanna. Please proceed.

Hey, guys. Congrats on the quarter and thanks for the question. To get to your full year guide, I just want to make sure I get the moving parts right. It seems like we are taking up our numbers in the first half, but just looking at the sequential growth profile, it looks at least versus prior that the back half, the sequentials are reduced versus our prior. And so I was just wondering if Has the growth profile actually changed? Is this related to the tariff kind of pull-in that you commented on last quarter? Are we adding to the first half but taking from the second? Just what are the kind of moving parts in the growth profile for the year?

Well, first of all, I don't think we're – having concerns, at least our current annual guidance doesn't have any concerns about second half strength. If you look at it, we extend the guidance range. If you look at the high end of the guidance range, we have regular seasonality and showing a strong second half growth. So it's really about, you know, there's uncertainty about with the current geopolitical situation and want to building some uncertainty in there. So I think we are still high confidence about our second half growth and with our visibility in Q3 and we're building up visibility in Q4, I think that I don't believe we're giving any signal that we have a weak second half.

Chris, going into this, Lewis, going into this call, I think the consensus was about 51% in the first half, 49% in the second half. And at the midpoint, I don't think those percents change much, but the dollar figures, I think, in every quarter would probably be going up a bit. So it's another way to think about it. But I point out also that... If you're in the upper half of our guidance range, you'd probably end up with seasonality pretty close to normal. So it's really your call. We're just saying it's an uncertain environment. It could happen and play out a lot of different ways.

Fair enough. Thank you very much for that, Lewis. I know you don't guide a few quarters ahead, but would you expect October to be up seasonally? I know January is typically down, but is there any reason to think that that October should be up overall?

I think we can help you with the shape, but as Fermi said, not the absolute numbers. And I think it's reasonable to think that that would be a positive sequential number, and it's probably reasonable to expect Q4 to be down sequentially. That's all we can answer at this stage, the shape, but not much more precision than that.

That's very helpful. Thank you so much, guys, and congrats.

Thank you. Thank you. Thank you. Our next question is from Torres Bamberg with Stifel. Please proceed.

Thank you, and congratulations on the results. For me, you talked about edge infrastructure, and I'm sure this is something that you're going to continue to elaborate on, but could you just explain a little bit what you mean by that? Obviously, we're not talking about big AI clusters here. So, yeah, if you could just add some color on what exactly you mean by introducing new products for edge infrastructure.

Right. So, I think, you know, if you look at how the device being distributed, on the top is really a data center and cloud. On the bottom is really the edge endpoints, which is where we are having serving our customer. But now, it's become clear with so many different advanced AI models happening, and you just cannot upgrade the endpoints faster enough, right? Of course that our customer continue want to replace the endpoints with new products or new cameras that can run efficient events AI models. But to upgrade the existing install base, you can imagine that there is a, you want to integrate multiple endpoints that already in the install base and using a server or AI box that can integrate all of those endpoints, video input, and run this model on that box, right? So that be the easiest way to upgrade the install base. And I think that's become a trend. It's become obvious. And among other things, this is just one early trend that we're seeing, and we believe that has momentum on that. And in the future, there will be many other on-premise servers, edge servers, but what can use our solution to.

Yeah, that's great, Kalar. And as my follow-up, you know, I know your segment revenues in IoT versus auto, but it sounds like, you know, non-camera IoT is really starting to proliferate here with, you know, IoT, industrial enterprise wearables and so on and so forth. Is that business sort of approaching 10% of revenue and will you potentially eventually split that out so that you don't just sort of have investors focus on the security camera part of the revenue?

A couple things there, Tory. It's Louis. Most of our revenue today, the data is getting ingested by our AI accelerator through the lens of a camera. You know, that hasn't changed, although we have said it's likely that that becomes an incremental opportunity for us in the future, especially as we go into the edge infrastructure. But, you know, Fermi made a comment in his script, you know, about security as an end market for us. And, you know, that's less than half of our revenue now. So now we're seeing, you know, very good growth, as you know, auto markets. is around 25% of our revenue. And then in other IoT markets, we're starting to see solid growth there and adoption of AI in a wide variety of markets. So everything is still ingesting data through the lens of the camera, but that probably changes in the future. And security is ground zero for us because that's where AI at the edge started. You know, we led that market, and now we're leveraging that expertise and applying it to a lot of additional vertical applications.

That's a great perspective. Congrats again. Thank you. Thank you.

Thank you. Our next question comes from Kevin Cassidy with Rosenblatt Securities. Please proceed.

Yes, thanks for taking my question. Also, congratulations. Great results. Speaking of those results, would you think with the strong product cycle that you're in, could there be a change in your seasonality, maybe as the human interface devices become less relevant in your revenue?

Yeah. You're asking about our CV products versus human viewing products?

A question with regard to whether our seasonality might not be as much of an impact.

Right. So I think for this year, I think with so many uncertainty on geopolitical situation, that seasonality is definitely a question mark for us. Although we are not saying there's no regular seasonality, we'll just say that we provide a much higher, a much broader range for the annual guidance to indicate there's uncertainty on the second half. But I think there's definitely a scenario that normal seasonality can happen.

I see. And you've piqued our interest with mentioning these new EDGE devices. You know, these are all your transformer-based SOCs?

Transformer-based.

Go ahead.

Yeah, I think the question was, correct me if I'm wrong, Kevin, it was a little bit hard to hear you, on the EDGE infrastructure issue. is do we expect that market to leverage our third-generation AI accelerator to a high degree? And the answer is yes.

Yes, obviously, because right now, we already announced NY655 this year for that particular market, but we also understand the need for the customers who are going to build another chip for the family of the product so we can deliver a complete roadmap for the customer. All the chips we're talking about today still leveraging our third-generation CV flow architecture and the software to minimize our investment, but at the same time provide a very competitive solution in the market. And more importantly, I think, as you know, that third-generation architecture can really do all of the other than AI models based on transformers.

Okay, great. That will be an exciting product. I look forward to hearing it. Thank you.

One moment for our next question. And it's from the line of Joe Moore with Morgan Stanley. Please proceed.

Great. Thank you. Thanks for the update and the good numbers. As you talk about these kind of edge AI focus, I guess, is this a shift in focus for you guys? And I guess, how are you thinking about the sort of more, the CV3 types of larger automotive ADAS opportunities? Are you moving resources maybe away from those things towards these other initiatives? Or are those initiatives still something that you're enthused about?

Auto is continued to be a focus, but I think, you know, with our current approach for auto is we only build a complete CV3 automotive series, as you know, that we have a 685, 655, and a 635, that complete line-up for the autonomous driving software. And also, we're going to continue to invest on our software side, both for the VizLab, a time-driving software stack, and the Oculite radar software stack. So that doesn't change. However, you know, we finalized already CV3 family for the automotive roadmap. We definitely have resources that we're going to put on the H infrastructure. And also we talk about we add another project, which is not in our annual plan, but we think with our revenue growth, we have a chance to build another silicon for H infrastructure, which we are doing. So we have definitely added a little bit more NIE table fee to improve our strength in this H infrastructure business.

Okay, thank you. That's helpful. And then I guess I know you don't like talking about this sort of more futuristic humanoid robots and things like that, but there's obviously – a lot of kind of upfront investment in kind of paving the way to those types of markets, and you have technology that should be important. So just how do you kind of frame that? Is that an opportunity that you're willing to invest resources into?

Yes. In fact, we are investing the resources. Let me maybe go a little bit deeper than before. The way we look at robotics and patient today, we view that market very similar to autonomous driving five years ago. What that means is that most of our customers, instead of trying to find the most efficient solution, they are still trying to piece different pieces of the solution together to build a prototype because the size of the market for each customer is still small. We are starting people using one box for the video perception, the other box for radar perception, and using a CPU to integrate them together. This really reminds me five years ago of the first generation of level two car coming out. It's a similar architecture. And we are in that stage right now. And we already have solutions like CV5, CV7 to provide video perception and radar perception for those kind of solutions. But however, we also believe, just like an automatic driving car, Moving forward for the high-volume robotic application, you need a domain controller, and you need to enter an AI software to drive this application. So we're definitely using our CV3 solution to continue to drive this application. But everything we're doing for this AI infrastructure, you can imagine that that also can help the robotic solution. But more importantly, that's talking about silicon and sulfur. But really go-to-market, you're going to start seeing maybe in the next quarter, we're just going to start telling, introducing the idea how we're going to change our go-to-market because we realize that, you know, in the past, we focused on addressing large customers. Now with the robotic application, the market is very segmented. Most of the customer has small volume, so we need to find a different approach, go-to-market approach, to address this need. And we will probably definitely start talking about that approach next quarter.

Hey, Joe, it's Louis. Just to wrap some part numbers around that. So for the coprocessing, you know, like, say, the perception, that would be parts like CV5 or CV7. And then, of course, the central brain, the domain controller Fermi was referring to would be like the end family of products. Great. Thank you so much.

Thank you. One moment for our next question. And he's from Suji De Silva with Roth Capital. Please proceed.

Hi, Fermi. John Lewis. Congrats on the progress here. Maybe you can help me frame this Edge AI server scenario Is there a way to think about the size of that relative to maybe the end devices, some ratio, or some way of thinking about the content of the servers relative to the device content? Any way to frame it so we can think about how it's going to grow in your revenue?

Right. So maybe let me help you to the number that I'm thinking about. You know, if you look at aggregate the current camera space, that's using security cameras as an example. There are roughly 1.2 billion install-based cameras which need to be upgraded. Either upgrade by a new camera with advanced AI technology or upgrade with an infrastructure box. And those kind of boxes usually integrate, I would say, 8, 16, 32 different cameras into a box. And the content for that box for us is three digits, and the low three digits. So I hope that gives you an idea of how we look at this market opportunity.

One thing I'd tack on there also is that, you know, having AI in the endpoint or in the edge infrastructure is not like a mutually exclusive thing. You can have AI in the endpoint along with the edge infrastructure servers.

That's great. Understood. And then my other question around the edge infrastructure market as you're going into this, how does the competitive landscape maybe shift in some perspective there versus things like FPGAs, GPUs, CPUs that already exist? target that market? Do you think about the competitive landscape differently or is it similar?

Thanks. So, in that market, it's a very new market, you know, when you're looking at the near edge and the far edge of the market. And so the SAM numbers like we're using are fairly small. So you do have some general purpose type processors used in these applications, whether it's FPGAs or, of course, GPUs. We approach this market with a much more efficient solution when you measure it in terms of performance per watt and consider thermal impacts on the total system cost. And so kind of the same advantages that we've talked about in other markets we'll be applying to this edge market initially say the near edge and your first question you mentioned you know AI servers you know that's probably going to be part of it too but maybe initially you'll hear about progress in some of the near edge markets first in particular those that use cameras got it thanks guys

Thank you. Our next question comes from Quinn Bolton with Needham & Company. Please proceed.

Hey, guys. It's Shadi Mitwali on for Quinn. Thanks for letting me ask the question. My first question is on some of the conversations you have had in regards to your customer's supply chain. I know last quarter you mentioned customers evaluating their own supply chains, which has caused uncertainty in the back half of this year. So just curious on how these conversations have progressed

talking to our customer about our supply situation. So we continue to have that conversation. One of the worries last time we talked about is whether we are our customer building up inventories. I think that we continue to have that conversation with customers. All of them told us that they are not building inventory, that they are watching the situation and that none of them are really eager to build any inventory at this point. From that point of view, I think we can feel comfortable with that. However, there's still always a geopolitical situation. Every day, as we know, things can change. So we cannot speak for what we don't know in the second half. So that's where uncertainty is.

Got it. And my follow-up is on gross margin. Sounds like some of your new CV chips have been tailwinds to ASB. However, gross margin is expected to decline next quarter. So I was just curious on what is driving the decline.

Yeah, I mean, from any quarter to quarter, it's really a combination of customers and product mix that is the primary driver of, you know, how that corporate gross margin rolls up. And so ordering patterns of different customers and, you know, their contribution, that's really the, I guess you could say the primary driver driver for any one quarters gross margin guide.

Got it. Thank you.

Thank you. Our next question comes from Gus Richard with Northland Capital Markets. Please proceed.

Yes, thanks for letting me ask a couple questions. You know, the video management systems that the 32 cameras or 60 or whatever are attached to, Those are coming out with obviously AI capabilities, and the camera has AI capabilities. And I was wondering if you could help me understand how that AI split happens and, you know, why you need it in both places.

Right. So the quick answer to that is, you know, with install-based, you just cannot replace all the install-based cameras fast enough with advanced AI cameras. So to enable the installed base with advanced AI models, this kind of box is required and probably easiest way to upgrade. So that's just the first answer. The second answer is with a lot of different AI improvement every month or every quarter. I can imagine that in the future you're going to continue to see more and more advanced model coming up. The camera can run a portion of it, but every time there's an advanced camera comes out, it's easier to upgrade the service with a box approach. So I think the combination of these two really drive the upgrade cycle.

Hey, Gus, it's Louis. Just to add some comments, John kind of touched on it earlier, but you could have, you know, CB2-based cameras in the field doing a detection and classification with CNN networks, and then you could provide an incremental layer of service with one of our Gen AI chips that could accommodate much larger parameter models. on the infrastructure side, the point of aggregation. And so maybe that's one example of how it would be architected.

Got it. And then just thinking about the market, at this point, China is not part of your market. And I was just wondering if you could comment on how big the not China market is for security cameras and sort of what you see your market share is currently?

You know, when we talk about our 7 and 10 numbers, we don't include China number anymore in any security market. So that's where we're at. And in terms of market share, outside China, I would say we definitely have a majority of the market share for the security camera in the middle and high end. On the low-end side, there are plenty of Chinese and Taiwanese suppliers trying to compete with the low-end with a $2 to $3 chip, which we don't compete there. So if you separate the line with the mainstream high-end to the low-end, on the top, we are probably the majority leader, and on the bottom, we are just one of the players.

Got it. Thanks. That's helpful.

Thank you. And as a reminder to our teleaudience, if you do have a question, simply press star 1 1 to get in the queue. Okay. We have a question from the line of Martin Young with Oppenheimer. Please proceed.

Hi. Thank you for taking my question. First question is, on the Edge AI infrastructure product, is the second chip something new, meaning that you are putting forward a development reacting to end market demand or something you have long planned in the roadmap?

It's a first case. In fact, after we talked to so many customers and what they need, we realized that, you know, R1655 is great for the first product, but we do need to have a second chip to keep competitive. And so, I think that second chip, but however, the second chip is averaging our current CV3, our third generation CV4 architecture and software. So the development is going to be fast, and also the cost can be easily controlled. But the add value is really helping customers have a better performance per watt and higher performance in the sense silicon.

Got it. And then in this quarter, accounts payable trends a little higher than normal. Is that associated with this new chip development?

Not specifically, Martin, no. I think as we started to grow the Q2 top-line guide, it's really more a function of building the inventory to support the demand that we're seeing. And so corresponding with that is the accounts payable associated with it.

Got it. Thank you. That's it for me.

Thank you so much. And ladies and gentlemen, this concludes the Q&A session. I will pass it back for final remarks.

And thank you all for joining us today, and I'm looking forward to talk to you next time. Bye.

Thank you and this concludes our program. Thank you for participating and you may now disconnect.