Ambarella, Inc. (AMBA) Earnings Call Transcript & Summary

Good afternoon, everybody. For one of the last sessions of the day, we have here with us Fermi Wang, the Chief Executive Officer of Ambarella, Inc. Fermi, thanks so much for being here.

Yes. Thank you for inviting me here.

Great. So I've got a few questions of my own, but if anybody in the audience has questions, there's going to be a QR code up on the screens besides me, and those will show up here, so I can ask those at the end of the session.

Okay. So to get started with, you guys have sort of transformed the business and IoT is now driving the majority of your revenue, and it's kind of clearly overtaken the auto end market. But on the other hand, your 2030 addressable end market estimates are more auto than IoT. So how should investors think about Ambarella today? Is it an IoT edge AI company? Or is it more auto-centric once CV3 reaches scale?

Well, the way I think about this is Ambarella is an edge AI company, which include automotive. If you look at edge AI, how it defined, my definition of edge AI is very simple, that you -- for any AI application, you don't require connected cloud. Majority of AI is running on the edge on some device. That's edge AI for me. By that definition, autonomous driving use edge AI device. So the way I look at it, Ambarella is focusing, investing on the edge AI market, including autonomous driving, autonomous drone, robots and any other system that require automation.

Okay. And how do you think about the balance of those 2 end markets? Is that -- do you have a strong view where that's going? Or do you just make your products and wait for the market to tell you?

Right. So I think that autonomous driving, obviously, the largest edge AI market today. And so that's why we still continue to think that it's a huge opportunity for us, and we're working hard to continue to secure the first major OEM design win for us. However, that other edge AI market continue to popping up in the last 2 years, and we start seeing more and more opportunity on the other edge AI device, we call the IoT side. It doesn't matter it's autonomic drone, edge inference boxes or -- that we talked last quarter or AI video telematics box company like Samsara, all those new applications that we didn't -- were not part of it 2 years ago, now all of the opportunity show up, and that continue to drive our revenue growth. So my opinion is auto continue to be the largest opportunity until it being taken over. And I think that there are definitely opportunities in any other space that will continue to become a bigger portion of business. But if you look at only 2030, I think automotive will be probably 50% of our potential TAM or SAM in that time.

Okay. You emphasized that there's a common hardware and software platform that you develop internally for both IoT and auto. So it's not like there's a team doing research for IoT and another for auto. So -- and at the same time, you've also shipped more than 36 million SoCs, right? So really significant installed base. So how durable is that platform advantage that you started to build with an Ambarella as you've got larger competitors and new ASIC vendors that are starting to target this like edge inference opportunity?

Right. So first of all, I think that the same hardware and software platform across all our silicon portfolio is important because, for example, one silicon we build can serve automotive, can serve robotic, can serve telematics, can serve enterprise security with same software SDK, but we help our customers build application on top of that. So from that point of view, and it's not only just one silicon, right? We have a family of chips. For example, CV2 family, we have 6 family of chips with different performance level, different price points on each chip. And the beauty for our customer is they must have multiple different product line from the high end to the low end. With the same hardware, same software, with a family of chip, they can pick any performance price point to serve the one market. But with the same software, they can compile and go to a lower-end chip or high-end chip and build the product without really redo the -- reinvest on the R&D dollars. That becomes a really important -- really a factor that we can continue to secure to our investor and our customer because they understand the strength that we have this unique offering that with multiple chip and they only do software, hardware once and can do multiple products, I think that's definitely helping us to keep our customers with us.

Got it. And when you look across the market at the other people trying to address the same end market as you, you've got some really, really large-scale players as well that you're up against, right, some much larger than you. So does anyone have a larger platform advantage than you have?

Well, in different place, definitely, right? For example, NVIDIA, which is really the largest possible AI company out there, I think they have a very strong position on the cloud, on the data center, which we will now touch. But on the edge, in fact, there is definitely a lot of discussion about -- in fact, a lot of our robotic customers using NVIDIA chip as a first prototype or first generation technology. And I was talking to one of our customers. They tell me why you want -- how you want to compete with NVIDIA on the edge side. I said for the robot, unless you are willing to put in the water cooling system, you don't have a solution for you. So definitely that I think CUDA and NVIDIA chip is very powerful and has performance, but it comes with some issues that I think we try to address. We try to count to edge device, which the latency matters, the power efficiency matters, cost matters, the bond cost matters and more importantly, in certain application, video quality matters. All the things are my benefit. So I think from that point of view, we do believe that that's the reason we focus on edge AI instead of trying to try to compete data center. I think we have a better position in those in the market.

Got it. So portable video has been one of the really major IoT growth drivers. There's action cameras, body-worn cameras, aerial drones. How broad is the customer and SKU footprint in portable video today?

Well, first of all, it's beyond that 3 type products you talk about. There's a wearable camera. There are people using that web camera, they're doing the video conferencing and drones. So there are -- in fact, the portable video category can go into 6, 7 different product lines. And we have multiple customers in this -- we call the portable video and other segment. So from that point of view, I think this continue going to be a growth area for us because some of the market is really old market, for example, webcam, but webcam was built for AI using AI to improve video quality is a brand-new offering. And we definitely think this is offering something that we can add value to. But also that drones with 360-degree camera, I really think that's a breakthrough because there's a customer going to build a drone with a 360-degree camera. And when you put on goggle and watching the drone flying around, just turning your head, you see the surrounding of the drones. That's a perception you've never seen before with any kind of drone. So from that point of view, I think this has become interesting with AI, more innovation can go into products. Therefore, we think with more AI technology, adding more AI performance in there will trigger even more interesting products in this portable video categories.

It's interesting looking back because the company's roots are very much in security video, right, in this one kind of narrow category, and it's becoming a smaller and smaller portion of your mix over time as nonsecurity things are far outgrowing it. So how do you see that mix developing over the next 3 to 5 years? And what are the trade-offs as those other categories grow more in terms of pricing or gross margin?

First of all, our enterprise security, the percentage dropped, but revenue grew. It will show you that -- in fact, our overall revenue is growing. And in fact, one thing I want to say, for example, one silicon we use in that enterprise security is called CV5. The same chip is using in the drones, using in the portable video, using in the security camera and using in the video conferencing and also using in the car. In fact, Rivian is using that chip in their car. So that just showing you that, that can really reuse our R&D dollars for same silicon, same software with a totally different application that help us to minimize R&D and leverage that to enable more different applications. In the future, I expect the market that we're going to focus on is the application can reuse our hardware and software platform and just by using -- by adding go-to-marketing and [indiscernible] to support the new application, that's the market that we're going to focus on.

I want to go back to the aerial drones for a minute. So they're clearly a meaningful new leg. How large do you think the volume opportunity is in terms of units over time? And are the barriers from here, are they more technical? Are they competitive? Are they regulatory? What needs to happen for that category to grow?

I think it's all above. Let me talk about this. But drone today is roughly 10 million units. If you take out the toy drones, that's not accounted. All the other drone combined 10 million units, including we call prosumer drones and also commercial drones. Prosumer drone is -- I define that as people use that to capture video, right, and to produce video. This is 9.2 million units and dominant by DJI, which is well known. And nobody really come close to compete with DJI in the last few years. Until recently, the window opportunity opens. And that opens because the U.S. government put a ban on the DJI drone in the United States. And that creates roughly, I would estimate 1.5 million units of market available for the second best. And I think that creates opportunity for us. DJI have been using their own silicon. So that is now available to us, but the market, I think, opened up for that. I think there -- we're going to see multiple drone company going there to -- go after this market. And then hopefully, with their momentum, they can go to other market and compete with DJI, but that's definitely a difficult situation. In terms of regulation, it's very well documented, right? In U.S., there are definitely regulations about what kind of drone you can fly, what kind of rule you need to apply, all of that, I think most of the drone players will follow that rule. I don't think that's an issue. So from the point of view that I think there's definitely a window opportunity for new players to come in, and we would like to be one of them.

Shifting over to auto. So you continue to invest behind the CV3 family for L2+ to L4 ADAS feature domain controllers. So what are the gating factors that are controlling the pace of you announcing your first OEM award?

Right. I would say this year is definitely particularly difficult for Level 2+ car for the Western players. If you look at, we talked about -- in January, we talked about the VW bid, right, and we lost to Mobileye. But after that, even our competitor didn't talk about many design win opportunity in the Level 2+ or above. I think there are 2 reasons behind it. One is, I think a lot of people still cannot come out a video -- a software solution that really can address Level 2+ efficiently. And that really delayed the project. The other thing is really that the feature and performance of Chinese OEM product, the L2+ and also Tesla's FSD proved to be really powerful products and try to compete with them. I think a lot of the Western OEMs are still trying to figure out what's the spec, what kind of time line they need to. So I think they delayed the decision because of those 2 reasons. And so we are continuing to believe that this is a market we need to focus just for the reason that this is the largest opportunity for the edge AI market, and we need to continue to invest, and we continue to work closely with the OEM. But there's another reason. In the last 2 years, it's become very clear that our investment on the -- for CV3 for the domain controller, both hardware and software can directly apply to robotic, particularly the mobile robots, right? In fact, if you look at what the requirement for mobile robots, you need a great perception to understand the environment, then you need to path planning to plan how you move around, then you need to a decision-making in the autonomous driving car is how you drive in the robots is how to using environment information to perform other functions. So from that point of view, from the perception and path planning, everything we did for the CV3 can be totally reused for this function. So with autonomous driving continue that we continue to focus on. But with the robot momentum on the market, we definitely believe this is an area that we can reuse our technology. That's the reason -- another reason we continue to focus to do the technology development.

Yes. So you mentioned Mobileye as one competitor in the automotive space. There's also Qualcomm and NVIDIA. There's a lot of emerging Chinese vendors as well. So how do you like the competition in that space? And what's your right to win or your competitive differentiation against them?

Well, I think the biggest problem for us, we are the smallest company in that list of the competitors. However, I do believe that we have the best technology among them in terms of power efficiency, the performance per watt, also providing a software package as a licensing model instead of trying to bundle hardware and software together. So from this point of view, I do believe we still have opportunity to continue to gain momentum in CV3. So competing with large corporation is difficult, but the key is today, most -- like I said, most OEMs trying to figure out how to compete with Tesla is technology, right? And I think that we believe that if people really focus on technology differentiation, we have a chance to be selected as a supplier to most OEMs.

And once you win your first one of those opportunities, can you size how big one of those programs could be over its lifetime? And what sort of slope or ramp we would see once won?

Well, let me use the VW project that we lost as an example. We were runner up in that project. Had we won that, it's easily $700 million or $800 million lifetime value to the company while we are doing $390 million targeted revenue this year. So that impact can be huge to our company in terms of momentum of the revenue growth as well as the investment in the different directions.

Yes. So in video security, competitors like Hikvision are normalizing inventory and then there's some export control considerations as well shifting around. So how is that market looking for you? And how do you feel about your long-term share opportunity relative to like the domestic Chinese?

Enterprise security, you are talking about?

Yes.

Okay. In fact, we are out of China already. In fact, 5 years ago, when Entity List was implemented by the Trump administration at that time, we were banned from selling to Hikvision, Dahua. And right afterwards, the Chinese government basically says they prefer using domestic solution in China. So we have 0 revenue from China market for our enterprise security. However, that help us to do -- we kind of transition that our focus to focus on non-Chinese solution. In fact, if you look at the major enterprise security camera vendors outside, we are probably the biggest supplier to all of them. And so from that point of view, I still feel that enterprise security continue to be an area that will give us more growth. And the growth is not coming from -- it's not only coming from the size, the growth of the market share, but the AI ASP that we continue to drive higher and higher. Our ASP 6 years ago was $6. This quarter was $16. And the reason is because we introduced AI chip in that 6x and gradually move up our AI ASP. And the AI ASP growth will continue because all the chips that we introduced, for example, our third-generation AI chipset starting from CV75 and CV72, the ASP is higher than our CV2 family by 30%, 40%. And then the CV3 is close to $100. So we expect our ASP will continue to grow. So I think -- to go back to enterprise security, the growth -- of course, some of that growth will come from the market share growth, but it's limited, but ASP potential growth can be a driver for that market.

That's actually one of the places I wanted to go next. So for fiscal 2026, the guide is that revenue growth will be more or less even amounts from units and ASP. Clearly, you've got some much higher-end SoCs that carry much higher pricing. So in the kind of nearest term, there's a lot of potential for ASP growth. But over the longer term, how does the unit versus ASP mix shake out?

It's really about what kind of design win we can get. Had we got the VW, the unit can grow also significantly. So I think that, that's why we need to continue to focus on bigger TAM of the market, right? So when we look at market opportunity, we definitely want to say, if there is a 2 different market, the selection has to go to the higher market TAM so that we can get more potential growth out of that. So definitely, we want to go to the bigger market so we can grow unit number. But however, the ASP growth is really about more and more -- deliver more and more AI performance really which is required by our customer. And more AI performance means people want to implement not just higher tops, if you may, but also different type of model. Our second-generation AI chip, we focus on CNN type of AI model. Our third generation will focus on transformer or Gen AI type model. And majority of revenue that we see today is still from our second generation. Our investment on third generation haven't generated much revenue at all for us. So I think when we move to the third generation, ASP will go higher because of performance, and that will definitely continue to help to drive our revenue growth.

And each generation is clearly being introduced at a much higher performance than the last. But if we think about over the life cycle of any given chip, what's the deflation or the kind of cost down that customers are expecting at any given level of performance? [indiscernible]

Is. Yes, this is a faith of a semiconductor industry, right?

Yes.

Customers expect you -- every year, you drive down your cost. There are 2 things we need to do. We drive down our cost of supply chain at the same time, which is getting more difficult because we are already in 5 nanometers. We're going to do 4 and 2 nanometers. With limited suppliers in this space, driving down that cost is getting difficult. So however, while you do this, you continue to drive down the cost or drive down your ASP to a certain product, it's getting more important, you overlay with new product line, which has a higher ASP and also kind of compensate the ASP drop and the revenue drop because of you give the better pricing to your customer. And to overlay that product line is important. And you cannot just fake overlay, but most of the time, if your customer telling you, you need -- this is a new feature, new performance, new video quality, we require and willing to pay more. This is the better way to overlay a new product line, which give us a benefit of compensate that the product -- the price reduction every year.

Do you feel that you're approximately able to match the cost-down expectations of the customers with what you're experiencing on the cost side and sustain gross margins? I think there's a 60%?

In the last few -- the last 20 years, we have been successfully doing that. Then going to 2-nano will be an interesting experience for us because 2-nano really is really powerful, right? But however, it's very expensive. And we haven't -- we're definitely counting on our supplier to continue to work with on the cost structure and the price. But I think that's -- it's our -- definitely our goal, and we believe that we will continue to maintain our long-term gross margin model of 59% to 62%.

What about operating expense? So right now, it looks like OpEx is growing in the low teens kind of range. There's a lot of investment on new products and field engineering and things like that. So -- and the world is changing fast and you want to be ready when it gets to your right. So how are you balancing continuing to invest in what you see as the most interesting opportunities on one hand with showing operating leverage in the model as you're growing revenue? How do you weigh those?

I think getting operating leverage is the most important financial metrics for us. We continue to value our revenue growth and to determine what kind of OpEx growth every year for us. We have to make sure that we continue to show up with operating leverage for our investor and also for the health of the company.

Okay. So when you think about your kind of cash generation in the near term, how do you think about allocating between R&D, potentially M&A and returning cash to shareholders?

Right. One thing that our investors continue to give us feedback is that Fermi, you have been spending 40% of your total revenue on R&D. I think that's a price to pay to compete with NVIDIA or Qualcomm. But however, we need to be -- continue to show 2 things. One is we need to show -- continue to show the leverage on the operating profit that we talked about. But the other thing is on the cash -- the operating cash point of view, we have been positive on the operating cash for 16 years in a row. So that just show you that we are trying to balance both, right? We want to invest heavily, but we know there's some financial disciplines we need to follow. And that's what we try to do. In fact, this quarter, we generated $30 million cash flow. And then also that our cash position is roughly $280 million, I think very healthy for our size. And we'll continue to invest R&D, but we think the discipline we talk about. But also we are looking at M&A. I think although today, I think the market valuation is really high for the private companies, but we continue to look at opportunity, particularly on 2 things. One is algorithm, one is software and that related to our market, particularly on the edge AI-related market. I think if there's anything that close to our space and the things that we cannot do internally, I will definitely continue to look at M&A as a way to improve our -- offering to our customers.

And what's the return from an acquisition like that? Is it something that helps kind of establish and increase the moat? Is it something that with more software capabilities, you can then charge more for the products, and so it just flies directly into revenue?

We have been very selective on our M&A. Most likely is that in the product offering that we need to go, but there's a piece of technology that we -- that is required for serving certain markets, but we don't have that. And we look at it as taking too much time for us to develop ourselves. That's where we're really looking at M&A at a time. So it's really about making sure that we don't have holes -- technology holes in our offering to our customers.

Got it. One more question on M&A. Clearly, the strategic value of edge AI assets is really high to many larger players. There's been a lot of conversation about consolidation as well. So how do you weigh -- for Ambarella, weighing independent and getting to own your own destiny on one hand versus your potential value to an acquirer on the other?

Right. In fact, I have been saying that we -- I believe that if there's a bigger -- much bigger platform owns Ambarella technology and willing to invest on that, I think we can grow faster than we are, right? And that -- I still believe that. But I think there are 2 assumptions. One is people willing to take over this and continue to invest on that. I think that's the way -- the kind of what I'm looking for.

Got it. Well, it's been fantastic to catch up with you today. Thanks so much for your time, Fermi.

Yes, [ Grant ]. Thank you very much. Thank you.