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

Thank you for standing by, and welcome to the Ambarella's Second Quarter Fiscal Year 2027 Earnings Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Louis Gerhardy, Vice President, Corporate Development. Please go ahead, sir.

Thank you, Jonathan, and good afternoon. Thank you for joining our second quarter fiscal year 2027 Financial Results Conference Call. On the call with me today is Dr. Feng-Ming Wang, 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 second quarter of fiscal year 2027. 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 risks, 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. 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 filed with the SEC. Access to our second quarter fiscal year 2027 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. Our Ambarella's property and cannot be reproduced or transcribed without our prior written consent. Before starting the call, we hope to see you at one of the following investor events that we have scheduled in our third quarter. First, on September 8, we'll host a D&B bus tour at our offices in Santa Clara. September 9 will be at Citi's 2026 Global TMT Conference in New York. September 15, we'll participate in Piper Sandler's Growth Frontier Conference in Nashville. September 16, we will host Sanford Bernstein's eighth Annual West Coast semiconductor bus tour. And during the week of October 4, we will have a European NDR with cities to be determined. Also available to investors during the third fiscal quarter will be our booth and presentations at the AI Infrastructure Summit in Santa Clara on September 15 to 17. We hope to see there whether we will lead the physical AI track with a number of EGI and robotics demos in our exhibit area. Fermi is now going to provide a business update for the quarter. John will review the financial results and outlook and then the 3 of us are available for your questions. Fermi?

Thank you, Louis, and good afternoon. Thank you for joining our call today. Driven by a new record level of AGI revenue, we reported fiscal Q2 revenue slightly above the midpoint of our guidance with non-GAAP EPS of $0.18, and with guidance for seasonal fiscal Q3. By product, we are in the midst of a very steep revenue ramp with our 5-nanometer CV75 and CV72 AI SoC and by market, we had sequential growth in both IoT and auto with automotive revenue driven by commercial vehicles. The market is increasingly recognizing the strategic value of AGAI as well as our AGAI and the physical AI platform leadership. We continue to make significant progress with the expansion of our AI platform leadership, including new go-to-market strategies, and the engineering and market development for a number of new higher-value SoCs, some of which extend our reach into entirely new markets. We remain optimistic about the long-term secular growth opportunities in the AGAI market and our R&D priorities are aligned with both the physical AI markets that represent a vast majority of total revenue today as well as the robotic and edge infrastructure markets that are in the early stages of developing. Altogether, our technology product and new go-to market, combined with the significant secular growth in AGAI are increasing our 5-year serviceable market forecast today. Before I review our new market forecast, I would like to step back and discuss the market environment we are in. Demand signals for the application of AGAI remains strong. At the same time, it is obvious that memory vendors and the entire supply chains are prioritizing AI data center demand, which is resulting in rising supply chain costs for everyone. Searching memory price and the scarcity of supply are impacting the entire industry. Related to this, we are providing significant assistance to customers who are attempting to create a wide variety of workarounds to the memory situation. Ambarella itself is also facing rising supply chain costs. and we plan to pass this cost to our customers to maintain our long-term gross margin target of 59% to 62%. Returning to our rolling 5-year serviceable market update. I would like to remind you of our methodology. Our SAM for any given year is based on the products we expect to have available for production in that year, overlaid on the total available market projections from a number of third-party research clients. So our 5-year SAM captures any revenue-generating products unannounced on our road map in the next 5 years. Our prior 5-year rolling SAM was announced in May 2025 and the projected a 5-year fiscal year '26 to fiscal year '31 compounded annual growth rate of about 18% with auto representing a slightly higher or proportion of the terminal year. Our new 5-year rolling SAM from $8.5 billion in fiscal year 2027 to $22.9 billion in fiscal year '32, represents a CAGR of about 20% with IoT markets now representing about 70% of the terminal year. While there are several factors behind the strong growth and the underlying mix change, I will focus on the most important change. In the last year, it has become clear that operational efficiency or the ability of enterprise to generate more revenue and/or to reduce expenses is likely to be a key driver of our emerging edge infrastructure business. Operational efficiency at age refer to the use of open weight and the distilled models running on on-premise inferencing hardware in contrast to the large frontier models that are down in the cloud. Benefits of this approach include reduced latency, data protection privacy, lower bandwidth costs and high reliability. [indiscernible] markets include security, retail, lodging, logistics, health care and more. The on-premise operational efficiency use case has emerged with growing expectations for sustainable high-volume influencing and increasingly for agenetic AI and the fiscal application that can perceive reason and ultimately act in the fiscal word. The key question has become who can help the enterprise lower the cost per useful AI influencing outcome. This is where Ambarella's superior performance per watt portfolio kicks in, providing the efficient edge intelligence needed to enable this next generation of agentic and the physical AI workload at scale. With this perspective, in the last year, we have several new products in development targeting on-premise hardware or what is company called a infrastructure. As you know, we already have our n65-AI SoC in the market, and we have additional unannounced AI SoCs in development. We also are implementing a stand-alone AI accelerator product line targeting the age infrastructure market. Together, this new age infrastructure products, both AI SoCs and standard alone are accelerators represent the single most important reason for the upward revisions in our SAM. Before I introduce our first stand-alone accelerator, allow me to be clear about our terminology. We define AI SoC as on integrating all of the accelerated computing functions into a single chip, camera perception, craters, CPUs, in coatings and so on. We define an AI accelerator as an AI processor that is not camera specific and targets a wide variety of digital or physical modalities. We believe this type of multimodality is critical for each infrastructure applications by target operational efficiency. [indiscernible] announced, I would like to preview one of the new AI [indiscernible] that will anchor this new product category for us with another well-defined, more performed product already behind it. We refer to this new AI SoC X7. This SoC is simple now and expected to land initial design wins in aged infrastructure applications where it can serve as an AI coprocessor for host processors such as ARM or H86. Together with our new product trust, expanded market reach and the SAM, we expect our revenue growth to be supported with 2 incremental go-to-market strategies. First is the multistep establishment of indirect sales channel and the second is a semi-custom chip strategy, both of which will augment our existing direct sales efforts. As a reminder, virtually all our revenue is generated by our direct sales teams. And today, I'm excited to announce 2 material partnership agreements to develop our indirect sales channel. Combined, this true partnership plan to drive a significant amount of incremental revenue over the next 7 years through customers who have largely been unserved by us so far. First, today, we announced Ambarella strategy partner with Cap gemini designed to help enterprises adopt HAI and the physical air solution faster by reducing the complexity moving from evaluation to scalable deployment. By combining Ambarella's power-efficient AI software and platforms, we kept Gemini's global engineering system integration and industry expertise the partnership and to help customers improve operational efficiency, enhance real-time decision-making and deploy intelligent systems and in physical world environment with greater speed, scalability and the confidence. In our second partnership to develop our indirect channel, today, we also announced a 7-year agreement with Macnica, a leading global technical distributor. Macnica will support both American's physical AI and the new age infrastructure products by developing and supporting an independent software vendor ecosystem, including onboarding, technical integration support and joint go-to-market programs. With this ecosystem in place, Ambarella solution can be offered as individual component or as a complete bundle for multiple HAI vertical markets. including video analytics, smart city, edge computing platforms, robotics, industrial IoT, intelligent transportation systems, retail analytics, security and surveillance. I want to emphasize the importance of the indirect channel to serve small and midsized customers and highly fragment market like robotics. However, the indirect channel is also critical to support. Our more complex SoC targeting the infrastructure where our broad network of partners is vital for our long-term success. Meaningful revenue is expected in 2 to 3 years and will grow as we introduce new products for the market. Our second incremental go-to-market is our semi-custom opportunity, which can enable us to gain more share in existing markets and reach into new markets. We have our first semi-custom project underway, the 2-nanometer [indiscernible] which expected to generate first production revenue in fiscal 2028. And we are in discussion with other companies for additional semi-custom chip projects. Our representative customer engagement this quarter once again demonstrate Ambarella's expanding traction across a broad set of applications, robotics, automotive, security, drone cameras and smart video intercoms. Whether CV72-based quadruped robot validates Ambarella's high resolution, high multi-camera HDI capabilities in robotics. A major AMP 100 communication equipment company announced an AI-based enterprise video intercom further extending our reach in the emerging access control [indiscernible] We landed another win with multi for AI trail cameras and win with Canon, Suprema, IDS and Seprofurther strengthen our AI monitoring pipeline with CV75, CV72, CV5 wins using our own AISP software. Through Tier 1s, we had 2 in-cabin vehicle wins with Tier 1s in China 1 for driver monitors and one and the other for more complex camera monitor system using -- used in Audi and the VW vehicles. The breadth of these wins and the wide variety of corresponding AI workload highlight the programmability and the flexibility in both our AI SoCs and our Cooper development platform. This ease of use is faciliating the onboarding and expansion of our indirect sales channels. Very few competitors can offer this type of proven platform with more than 50 million AI SoC shipped. In conclusion, I remain very excited about the overall growth opportunity of the HAM market and our company's specific growth drivers put us in a unique position to benefit. Ambarella expanding beyond low-power AI OC to deliver the complete foundation for physical AI, and we are becoming a full stack fiscal AI platform provider. With that, I will now turn it to John.

Thank you, Fermi. I'll now review the financial highlights for the second quarter fiscal year 2027, ending July 31, 2026. I will also provide a financial outlook for our third quarter of fiscal year 2027, ending October 31, 2026. 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 and acquisition-related expenses, adjusted for the impact of taxes. In addition, this quarter, as described in our Q1 fiscal 2027 10-Q filing as a subsequent event, we recognized a $9 million reduction in our GAAP research and development expense due to the cancellation of a customer's development project. We do not expect any impact on our non-GAAP outlook from this development. For fiscal Q2, revenue was $108.1 million, slightly above the midpoint of our prior guidance range of $105 million to $111 million, up 7.7% from the prior quarter and up 13.2% year-over-year. Automotive revenue established a new revenue record on continued strength as the commercial vehicle adoption of AI remains strong and auto revenue slightly outpaced the growth in our IoT business, where our enterprise-driven businesses outperformed our consumer-led businesses. Non-GAAP gross margin for fiscal Q2 was 59.3%, below the midpoint of our prior guidance range of 59% to 60.5%. Non-GAAP operating expense in Q2 was $57.4 million, slightly below the midpoint of our prior guidance range of $56 million to $59 million. Q2 net interest and other income was $1.8 million. Q2 non-GAAP tax provision was approximately $344,000. We reported Q2 non-GAAP net profit of $8.2 million or $0.18 per diluted share. Now I'll turn to our balance sheet and cash flow. Fiscal Q2 cash and marketable securities were $272.3 million, decreasing $5.5 million from the prior quarter but increasing $11.1 million from the same quarter a year ago. The sequential decrease in cash and marketable securities was primarily due to higher payments for IP licenses. Receivables days sales outstanding decreased from 35 to 32 days. While inventory dollars declined 4% sequentially, the days of inventory increased from 145 days to 157 days. Operating cash outflow was $260,000 for the quarter. Capital expenditures for tangible and intangible assets were $6.8 million for the quarter. Free cash outflow was $7.1 million for the quarter. During the second quarter of fiscal year 2027, we did not repurchase shares of our stock. During the second fiscal quarter, Ambarella's Board of Directors authorized a new $50 million repurchase program valid through June 30, 2027. The repurchase program does not obligate the company to acquire any particular amount of ordinary shares and it may be suspended at any time at the company's discretion. WT Microelectronics, a logistics partner in Taiwan that ships to multiple customers in Asia, was 60.2% of revenue for the second quarter. Acuto, a logistics and distribution partner in Japan was 11% of revenue in the quarter. I'll now discuss the outlook for the third quarter of fiscal year 2027. We are anticipating favorable seasonality in our fiscal third quarter, with revenue in the range of $115 million to $124 million or $119.5 million at the midpoint. At the midpoint, we expect our growth to be led by physical AI demand from the IoT market. We expect fiscal Q3 non-GAAP gross margin to be in the range of 59% to 60%. We expect non-GAAP OpEx in the third quarter to be in the range of $56.5 million to $59.5 million. We estimate net interest and other income to be approximately $1.9 million, our non-GAAP tax expense to be approximately $700,000, and our diluted share count is expected to be approximately 44.9 million shares. Thank you for joining our call today. And with that, I'll turn the call over to the operator for questions.

[Operator Instructions] And our first question for today comes from the line of Christopher Rolland from Susquehanna.

This is [indiscernible] Olivier on for Christopher Roland. So -- it's nice to see your road map sort of expanding, and I know that you announced this X7 accelerator. I was hoping to hear a little bit more about this new chip -- is this a chip that you can bundle with your existing N1 portfolio? Or does this address a different part of the stack.

So yes, Chris, for the X7, this is chip is an accelerator which can be bundled with any host, including our own chip. So in fact, that our customers using a certain part number and they feel they need to have more AI performance for certain workloads the X7 give them flexibility to upgrade the product without redesign the Board. So this accelerator definitely is a way to design that. But in addition to supporting our own SoCs -- but any other CPU like Armor [indiscernible] Intel chip, Intel CPUs that can -- we can also bundle X with that as a AI Accelerator.

Great. Appreciate this. And for my second question, I wanted to ask about sort of the physical AI and human not opportunity. Is this responsible at all for this increase in SAM? Are there any new engagements or new designs that you can point us to?

Yes. So definitely, that's a big part of that. And in the last earnings call, we talked about in design win for the robots, including for roughly $100 million, although we didn't give you another breakdown, but I can say that we add more design wins to [indiscernible] pipeline and the higher revenue target. So from that point of view, we continue to make progress. But in addition to robots, I also think that each infrastructure and also enterprise security as well as portable video are all the reasons that we are increasing our same number.

Yes. Do when we did, Fermi mentioned a quadruped robotic dog with a CV72-chip this quarter. So continue to add on to the robotics wins we've described before.

Our next question comes from the line of Joe Moore from Morgan Stanley.

I wonder, first, in terms of the broader ecosystem, you talked about some of the challenges on memory. What does that mean for your business? Do you think -- is there a risk of pull forwards or things like that because people are trying to get ahead of memory price increases? Is there pressure on you? Just what are you seeing from that memory impact from your customers?

Right. So we continue to monitor this situation very closely [indiscernible] by talking to customers all the time. So for Q3, we are comfortable with our -- our -- the guidance we provide today. In Q4, we continue to to the customer to make sure our customer will have -- we can secure enough memory for a Q4 business. That's definitely the uncertainty that we are dealing with.

Okay. That's helpful. And then in terms of opening up to a broader ecosystem distribution partners, things like that, I think you made the comment about -- that would take a couple of years to inflect. I guess I would sort of think that those customers would act a lot more quickly and would that pipeline could build a lot more quickly than what you had seen previously in automotive. Just what do you -- what was the comment that I maybe misunderstand there? And then what is the time line to start to see traction from that kind of broader ecosystem?

Right. So when I say 2 to 3 years, we talk about meaningful revenues. And I agree with you that we -- in fact, we really start seeing a small amount of design wins which can generate rev next year. But when we talk about meaningful revenue that will have an impact to our revenue forecast, I think that will take 2 to 3 years. In fact, when we talk to both Capgemini and Macnica, we kind of -- in fact, the range of revenue we are expecting from this collaboration is $0.5 billion with each 1 of them. So from that point of view, we definitely looking forward to gradually ramp up the revenue for the next couple of years and start seeing meaningful revenue behind that.

And our next question comes from the line of Tore Svanberg from Stifel.

Congratulations on [indiscernible] and Capgemini partnerships. I'm curious on those, Fermi, what are some of the early use cases that those 2 partners are going to be hoping you maybe you can call out some markets or applications. And how should I think about that in the context of your Cooper platform? And are they -- are they going to be working with you on Cooper? Or are they going to be providing some of their own software? Just curious how that's going to play out?

Right. So let me answer the second question first. Yes, both of them will use Cooper. In fact, that's a key driver for them to select work with us because they see a very mature software platform, they can immediately tackle on and start building around it, generating infrastructure for their own product line. So that our mature SoC as well as the material Cooper software platform is the probably most critical engineering aspect that we offer to our partners. Go back to the potential market that we are talking about. In fact, there are multiple of them. And in fact, I talked to by [indiscernible] CEO in that meeting, they are highlighting that they have already sized winning design wins with our solution on drones and retail channels and also manufacturing. So that is definitely -- you can see that it's really a large market. But however, most of the design wins is small and segmented at beginning, but can ramp up -- if they can ramp up to a large volume of business, that will take time. But we always start seeing our partners start talking about different applications.

They can work together as well. As Fermi said, Macnica can serve small to midsize markets that oftentimes are very fragmented, but really for Capgemini, it's large enterprise customers, and you can look at who they talked about before. Those are the type of customers we'd really go after with them. So they're very complementary to each other.

Very good. And as my follow-up on the edge infrastructure market. This is obviously a completely new area. It sounds like that's the sort of biggest contributor to your increased SAM. I'm just curious, who is going to be some of your partners there? I mean, are these going to be your end customer sort of building their own infrastructure? Or is there going to be like an intermediary company that's building it? It's going to be the traditional server guys? Yes. Just curious how that's all going to play out.

Well, I think obviously, we're going to continue to talk to some of the large customer directly. But at the same time, we're counting on Capgemini and Magnica help us to penetrate because they're already in that market, they're already selling solution to the existing AGI customer with their existing solution. So working with them will help us to ramp up our revenue much better than just we're talking to direct customers directly.

And our next question comes from the line of Quinn Bolton from Needham & Company.

I just wanted to ask just longer term on the -- sorry, Magnico and capgemini partnerships. Does that change the long-term gross margin target? I assume that there's probably some allocation of revenue that would be attributed to those partners. And so wondering if that has any gross margin implications as that indirect channel ramps?

Right. So today, I think our long-term gross margin is still 59% to 62%. We definitely try and continue to watch because this is just -- we just start ramping up this business if there's any change, we'll definitely inform our investors. But today, for us, after we talk to Capgemini and Magnico, we don't feel there's any need to change that target today.

Got it. And then I guess just a clarification on the $9 million charge for the project that was canceled. Was that a semi-custom project that was canceled? And does that have any impact on your expected revenue pipeline for the semi-custom business?

Yes. Thanks, Quinn. It is not one of the semi-custom opportunities that we were -- that we've talked about. It was a development project with I guess you could say, an automotive customer, auto autonomy customer, and we've been negotiating the termination of that for quite some time. And in Q2, we finalized the agreement.

And our next question comes from the line of Kevin Cassidy from Rosenblatt Securities.

Going back to the shortage on the memory side, and you've got near-term visibility. But I'm wondering on the design and I know our customers or the market out there is probably dominated by a GPU-based embedded product that uses much more DRAM than years with. I seeing any additional interest because you're more efficient with DRAM content?

Well, yes. First of all, the memory situation is [indiscernible] for everybody, but some of our competitor who has more money to buy multiple memories. But however, any customer who comes to us for the HAI or physical AI they probably only use GPUs for their first-generation product, and they understand. So the memory cost is just one reason, but more importantly is power efficiency and other rate. But the memory cost definitely is a driver for people to start considering what's the more efficient way to do the product. So I agree with you that some of the most -- almost all the customers who came to talk to us is because our power efficiency solution and a lower-cost solution what they're using.