Ambarella Inc Q2 FY2024 Earnings Call

Thank you for standing by, and welcome to Ambarella's Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. 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.

Thank you, Jonathan. Good afternoon, and thank you for joining our second quarter fiscal year 2024 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO, and Brian White, CFO. The primary purpose of today's call is to provide you with information regarding the results for our second quarter fiscal year 2024. 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 our 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. 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 filed with the SEC. Access to our second quarter fiscal 2024 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 Ambarella's property and cannot be reproduced or transcribed without our prior written consent. Fermi will now provide a business update for the quarter, Brian will review the financial results and outlook, and then we'll be available for your questions.

Thank you, Louis, and good afternoon, everyone. Our fiscal Q2 revenue was approximately flat sequentially and consistent with our guidance. Our AI business grew sequentially and year-over-year, while our Video Processor business was down sequentially and down about 50% from a year ago. Our blended ASP in Q2 was above $12 and is on track to grow about 20% year-over-year, thanks to the reach and mix of AI SoCs, highlighting the value of our emerging AI Inference Processor business. Our mid-to-long-term growth outlook for the AI Inference Processor business remains positive. However, the near-term environment is very challenging for our overall business. Customers are now more aggressively reducing their inventory, and we are now seeing some pockets of weak end-market demand, which complicates our customers' ongoing inventory reduction efforts. Given this, we have reduced our second half outlook. We are not expecting a recovery in calendar 2023, but we do anticipate our customers' inventory will normalize by the end of the year and set us up for a return to growth in calendar 2024. We continue to expand our position in the rapidly evolving AI inference processor market. Cumulatively, we have shipped more than 17 million AI inference processors into devices and endpoints for IoT and automotive applications, and we are now expanding our AI inference processor reach into vehicle autonomy. As announced on the last earnings call, we continue to evaluate the AI inference accelerator market opportunity. I will now summarize the status of our three major SoC product families, Video Processors, CV2, and CV3. First, Video Processors are expected to account for about 40% of total revenue this year, down from 55% last year, and they typically command a single-digit ASP. For several years, we've been prioritizing our limited resources on AI technology and products, and for this reason, we anticipate our video processor revenue to continue to contract. However, the revenue impact from the video processor contraction in fiscal year 2025 is anticipated to be significantly lower than what we are experiencing this year. Second, our CV2 family of SoCs establishes Ambarella’s position in the AI inference market; these SoCs are expected to approach 60% of our total revenue in fiscal 2024, up from 45% last year. This family of AI inference SoCs commands an ASP close to $20 and serves computer vision applications for automotive and IoT. CV2 remains an important growth market for Ambarella in the mid-to-long term. Third, our CV3 family of SoCs first began to assemble a year ago. Based on our third-generation AI inference technology, this SoC targets more challenging AI inference workloads, such as partial or complete mobile system autonomy. The CV3 family of SoCs ranges from $50 to more than $400 per SoC, and the autonomous driving software stack optimized to run on CV3 can add hundreds of dollars per unit of incremental software value. The AI inference processor embedding our CV3 SoC is a starting point for our evaluation of the Gen AI acceleration market. In the last quarter, we began to port Meta's Llama 2 to the CV3 ADI, and we expect to have chatbot demos available later this year. We will provide updates on our continuing evaluations and encourage seeing generative AI opportunities emerging on both the server and the device side of the market. I will now summarize representative customer activity in the quarter. Design activity in the enterprise security camera market remains robust among medium customers worldwide. Motorola introduced its H5A multi-sensor camera based on our CV2 AI SoC. The camera offers up to a 360-degree view utilizing through four image sensors with up to 32 megapixel resolution and AI analytics. Axis, a unit of Canon, announced the 2 megapixel M4215 cameras and the 4K M4218 cameras, both based on our CV25 AI inference SoCs, targeting indoor surveillance applications. Japanese market leader i-PRO announced the expansion of its Rapid PTZ X-Series and S Series with 16 new models based on our CV25 and CV22 AI inference processors. DynaColor introduced Smarter Q, its next-generation multi-directional camera using our CV5 AI processor to support four 5-megapixel sensors. In South Korea, Hanwha launched three new bi-spectrum AI cameras based on our CV2 AI SoC. These cameras provide 4K video and thermal view simultaneously for the rapid detection and classification of vehicles or insurers. I will now talk about representative customer activity in the automotive market. In our May 30 earnings call, I mentioned the positive feedback we received at the Shanghai Auto Show for our CV72AQ AI inference processor, a derivative of the CV3 family of SoCs. During Q2, this is a Tier 1 in China, and I am pleased to report multiple Tier 1 wins for Level 2+ applications. We expect some of these Tier 1 projects to commence production in the second half of the calendar year 2025. We are pleased to announce our first CV5 win in a passenger vehicle. We expect this win to enter production in the next 12 months. In this application, the CV5 will support AI inference processing for multiple cameras. Additionally, in July, GAC Motor in China unveiled its hyper GT intelligence coupe, including an L2+ ADAS intelligent driver assistance system based on our CV22AQ. Recently, the Chinese government implemented a new policy allowing camera monitoring systems (CMS) to replace conventional left and right side mirrors. This policy also covers interior rear mirrors, with CMS-enabled models becoming legal beginning in July 2023. This CMS system represents a significant opportunity for Ambarella's CV2 family of AI inference processors. During the quarter, BAIC, one of the largest automotive OEMs in China, began selling SUVs equipped with the CMS system based on our CV22AQ. In the automotive aftermarket, Toyota introduced its wireless backup camera system for trailers based on our H32AQ video processor. The camera will be an option for Toyota's model year 2024 Sequoia and Tundra trucks. Canopy, the startup resulting from Ford and ADT's 2022 joint venture, introduced its first product, the Canopy Pickup Cam, based on our CV25 AI inference processor. The camera provides a full HD recording, 180-degree field of view, person detection, and reach-in detection for the back of a pickup. In June, action camera maker Insta360 announced its GO 3 camera, a lightweight, but powerful 2K camera that utilizes our H22 video processor. These representative engagements indicate a healthy pace while continuing customer design activity for AI inference processors. Our investment strategy is aligned with the anticipated market demand for more sophisticated software-intensive AI inference applications. In the last three years, thanks to the CV2 family, we have demonstrated the ability to capture more value per win as customer demand migrates to AI from video processors. Looking forward, we believe our newer products such as the CV5, CV72, and CV3 are well-positioned to support the increasingly sophisticated AI inference workload our customers are anticipating. This new product ramp, as we also capture more software value, is expected to lead to an increase in our blended ASP. While actively managing expenses through the current market turmoil, we will continue to drive our strategic R&D investments to fully realize the AI inference market opportunities we have discussed today. With that, Brian will now discuss the Q2 results and outlook in more detail.

Thanks, Fermi. I'll review the financial highlights for the second quarter of fiscal year 2024 and provide a financial outlook for the third quarter ending October 31, 2023. 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 and acquisition-related costs adjusted for the impact of taxes. For fiscal Q2, revenue was $62.1 million, in line with the midpoint of our prior guidance range, flat compared to the prior quarter, and down 23% year-over-year. Sequentially, IoT revenue was up slightly, while automotive revenue was down slightly. Non-GAAP gross margin for fiscal Q2 was 64.6%, at the high end of our prior guidance range. Non-GAAP operating expense was $46 million, below our prior guidance range of $48 million to $50 million, driven by continued expense management and the timing of spending between quarters. We remain on track to meet our internal product development milestones. Q2 net interest and other income were $700,000, and our non-GAAP tax provision was $800,000. We reported a non-GAAP net loss of $6 million or $0.15 loss per diluted share, equal to the prior quarter. Now I'll turn to our balance sheet and cash flow. Fiscal Q2 cash and marketable securities decreased by $10.9 million to $216.5 million. DSO was relatively flat at 45 days, while inventory declined from 151 to 147 days, down $6.5 million from the prior quarter. Cash used in operations was $6.8 million, and capital expenditures for tangible and intangible assets were $5.4 million. Free cash flow, defined as cash from operations less CapEx, was minus 20% of revenue for the quarter and positive 4% on a trailing 12-month basis. We had two logistics and ODM companies represent 10% or more of our revenue in Q2. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 54% of revenue. Chicony, an ODM that manufactures for multiple IoT customers, represented 14% of revenue. I'll now discuss the outlook for the third quarter of fiscal year 2024. The near-term revenue outlook is challenging. Customer inventory management actions have accelerated, and pockets of end demand softening have appeared. Considering these factors, we estimate that our fiscal Q3 revenue will decline to approximately $50 million, plus or minus 4%, driven by our IoT end market. At this time, we anticipate that this revenue range could continue into our fiscal Q4, with sequential revenue growth resuming in our fiscal Q1. We expect fiscal Q3 non-GAAP gross margin to be in the range of 62% to 64%. We expect non-GAAP OpEx in the third quarter to be in the range of $46 million to $49 million, with the increase compared to Q2 driven by higher R&D tied to new product development activities. We estimate net interest income to be approximately $1 million, our non-GAAP tax expense to be approximately $700,000, and our diluted share count to be approximately 40.1 million shares. Ambarella will be participating in the Evercore Semiconductor Conference on September 6, the Asia Investor Conference on September 12 hosted by NASDAQ, the Morgan Stanley Bank of America future car series on September 28, and the Mobility Conference hosted by UBS on October 2. Please contact us for more details. Thank you for joining our call today. With that, I will turn the call over to the operator for questions.

Certainly. One moment for our first question. And our first question comes from the line of Christopher Rolland from Susquehanna. Your question, please.

Hey, guys. Thanks for the question. So if you could highlight a little bit more on the pockets of weaker end demand that you're seeing there. And then, maybe you can put this in terms of under-shipment by end market. Last quarter, you talked about a customer that was under-shipping by 30%. Has that under-shipment changed at that customer, and have new customers joined that kind of level of under-shipment as well? Thanks.

Right. So first of all, in terms of the pockets of weak end market demand, I think there are two areas. One is, of course, in China. We generally think that the Chinese market is weaker than the other markets, but more specifically, in our whole IoT business, we do see some weakness, and we were expecting some demands for the year-end sales, but we don't see that. So we expect to see a weaker market in consumer IoT. Those are the two areas that cause our allowance. In terms of the customer you mentioned from last quarter, in fact, that customer has pushed out demand even further, and so our shipment to them will be even lower than the 30% we talked about last quarter. I don't think there are new customers adding to the list, but it's just that a lot of customers are already on the list, and we see a new wave of push-out and cancellation as we approach the end of the quarter and into August.

Understood. Perhaps also the revision for next quarter was pretty significant. Can you talk about what kind of backlog coverage you have going into each of these quarters? What kind of visibility you have? What kind of turns you typically need in each of these quarters? And then, just kind of broader picture, I think you guys thought maybe July would be the last of all of this and now it looks like the weakness is going to continue through January. I couldn't quite sense it; was January going to be flat? Was it going to be up a little, down a little? Any of your thoughts there? And why do we have confidence that that is indeed going to be the bottom and will bounce from there? Thank you.

Hey, Chris. This is Brian. In terms of backlog coverage coming into any quarter for the company, we typically enter each quarter with backlog and don't rely on turns to make the forecast that we provide. That remains the case. So, as we give guidance for Q3, Q3 is covered with backlog. As we look forward into Q4, you asked about whether that’s flat or up or down. In the prepared remarks, we discussed an expectation that our range of revenue in fiscal Q4 will likely remain in a similar range as Q3, and again that’s based on additional clarity that we’ve obtained as we’ve moved through this cyclical correction. Certainly, we’re much farther through that correction at this point. We’ve seen some new information and incorporated that into our current outlooks. We think we have greater confidence in our ability to get our heads around how this is shaping up at this point. We think that there is an opportunity for sequential revenue growth as we move into our fiscal Q1 for '25, but that’s what we see at this point in time.

Thanks, Brian. Appreciate it.

Thank you. One moment for our next question. And our next question comes from the line of Quinn Bolton from Needham and Company. Your question, please.

Hey, guys. Thanks for taking my question. I guess, first, Fermi, you mentioned some of the opportunities for the CV72S in China, where I think you mentioned having secured several Level 2+ ADAS wins that ramp, I think you said towards the end of 2025, but just wondering if you could give us any more color on the magnitude potentially of the lifetime revenue of those wins? Are they significant, or are they sort of smaller projects? And then, I've got a follow-up. Thank you.

Right. So, I talked about the several design wins with Chinese Tier 1 for this Level 2+ application, and the application is very specific, which is Smart ADAS plus parking for the Chinese market. We believe this is going to be the next high-volume opportunity in China to replace the current single-camera ADAS market. I think the price is right, the feature is right, and we also have major OEMs looking at and evaluating the product at this point. We think this could be as big as the current ADAS market given time. Of course, we are ramping up the revenue in the second half of 2025, and while the value will be ramping up, we believe it can represent significant value for the Chinese market.

Thank you, Fermi. For my second question, it seems that you are making progress on the data center or enterprise AI inference application. I believe you mentioned the Meta Llama model being integrated into the CV3 chip. Can you share what the next steps for that project are? Where do you stand on software and platform development? Are you still considering an 18-month to 24-month timeline for potential revenue from this opportunity? Is that the correct timeframe to assess?

Yes. First of all, we started porting Llama to us as soon as it became available, and I think we've made great progress on that. We plan to demonstrate this Llama in a chatbot demo to our customers sometime in the coming quarter. I think we continue to believe that our current CV3 represents not only a cost-effective and power-efficient solution but also performance-wise is capable of competing with A100. From that point of view, we continue to develop, but I think you hit on an important task which is to continue building in the software infrastructure to support customers. That's definitely another area we are ramping up resources for. We already carved out resources from the current employee pool to support that effort. But as we move forward and start engaging customers and providing customer support, we will probably need to increase headcount, but that's a second phase after we start engaging customers with our chatbot demo. In terms of revenue, last quarter, we stated this is more like a 24-month cycle, and I continue to believe that’s the case.

Perfect. Thank you, Fermi.

Thank you. One moment for our next question. And our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please.

Great. Thank you. Can you talk about how you're thinking about spending your OpEx at this point close to your revenue? I understand revenues were a temporary low point. Just how are you thinking about that sort of balance between the importance of the revenue pipeline versus that sort of near-term cash burn?

So, Joe, I think you’ll notice that we are definitely trying to control expenses; you can see that our Q2 OpEx came below the guidance, and that’s the direction we’ll continue to look at where we can cut and where we can save, but however, we still want to continue to invest in our strategic directions, namely CV3 architecture, as well as for the auto and IoT markets. Those are the three big pieces of the investment area. But things before we align, we need to look at whether we have the resources to support it. While we continue to manage expenses carefully, we do not want to sacrifice our strategic directions.

Great. Thank you. And then in terms of the video processing market that you talked about, we've obviously recognized that there was going to be a replacement cycle from video processing to computer vision, but do you think you're losing share in this segment, this sort of legacy market that aren't moving to CV? Is that part of why the numbers are challenged here?

I think what I said in the consumer IP market, the majority of the products today focus on low-end and cost-competitive solutions, and that’s where we don't spend a lot of money to invest. As you know, our investment strategy is always focused on the areas where we can continue to demand higher AI performance. For the consumer IoT side, we do have a focus on the low-end SoC roadmap, which definitely hurts us. I believe that’s where we have the biggest risk of losing market share.

Great. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Matt Ramsay from TD Cowen. Your question, please.

Thank you. Good afternoon, everyone. I hope you can forgive me for this question, Fermi, but I may have read too much into the tone of your earnings release and some of your comments. Joe just asked about your investments and areas of focus, and what I'm trying to understand is that the company's focus appears to have shifted significantly. It seems like there is less emphasis on your camera business and more focus on investments in hardware and likely more software to support inference, including some data center applications. Should we interpret the tone from the last few quarters’ calls as an indication of a major change in direction for you and your team? Additionally, has there been any change in the company’s focus regarding the automotive market, particularly in terms of revenue expectations or investment? If I'm misinterpreting anything, please let me know, but I believe this is an important question to discuss.

Right. First of all, I think we continue to be committed to the IoT market. I think that this is, when you say camera, I think you meant IoT market. I think that's one area we need to continue to focus on and continue to provide solutions. After we think that we have a differentiated technology as well as a broad customer base, we need to continue, and we will continue to provide solutions to our customers. I think that is one area I will never say we take our eyes off the ball. Given that, I think we want to continue to invest in auto, but when you see change in auto strategy, one thing that I would say, what's happening in the last six months is we believe that the Chinese market will give us earlier and shorter-term revenue than the other markets. We are definitely focusing our resources on the Chinese market for the CV72 and CV3, and I think that's an area we believe can provide faster revenue. However, that doesn't mean we don't focus on our USA, Europe, or other markets that we can get CV3 designs, but obviously, those designs will take longer to reach revenue. I think it's really a focus on short-term revenue versus our longer-term opportunities. I will say regarding LLM, one thing that has become very clear, even in our current market like professional security cameras, when we talk to our professional security camera customers, they all start thinking about how to leverage LLM to integrate multiple cameras into the services they provide to their customers. Similarly, automotive companies are also starting to think about larger transformer models, which increases performance while we invest in the AI model. It has become clear that LLMs also represent a roadmap for all our existing customers.

No, thank you, Fermi, for all the color. I appreciate it. I guess as my follow-up question, you mentioned there’s going to be different phases of your new investment around inference and LLM. Have you guys thought about sizing some of those investment areas? I mean, what number of people or dollars are you shifting internal resources? And then, if it goes well, like what kind of magnitude of investment are you guys considering given where the P&L is right now? Thanks.

Right now, so for the current phase, we talk about we are only carving out a team that we are using from our current resources, which are under our payroll already to do that, but obviously, when we start ramping up, we probably need to duplicate a similar size of team to support the LLM. So we’re talking about anywhere from 60 to 80 people total to support our limited engagement for the customer. Our goal is not to hold the possible customer back; we need to prove the concept. We have several customers that really want to have a second source for LLM on the server side, as well as several customers in our current base that can use LLM for their roadmap. We think we can fund this activity with our P&Ls.

Thank you. One moment for our next question. And our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.

Hi, guys. Thanks for taking the question. I want to ask a near-term question and then I'll have a follow-up. On the near-term side, I guess there's kind of two parts, so forgive me for that. For the guide for the third quarter, Fermi or Brian, you mentioned that the majority of the weakness should be in the IoT side, not auto. I just wanted to get some color on that. The second part of the first question here is going to be the fiscal year basis; I think Joe kind of asked it earlier, but it looks to me like your non-CV revenues are going to be down about 50% year-over-year. How much of that, if you can guess, do you think is share that just gone versus the low-end stuff you mentioned versus just a cyclical dynamic of inventory burn? And some of that will snap back.

Right. First of all, I believe that in the short term, it’s important to address that the question relates to...

I think the first part of your question, Ross, was confirmation that the weakness we see in revenue for fiscal Q3 is driven by the IoT side of the equation, and that is correct. We're seeing obviously some significant rebalancing of inventory and orders across our businesses. But in terms of what's driving this leg down in revenue between Q2 and Q3, it appears to be essentially all IoT at this point.

On the second part, the video processor side is definitely part of the weakness we talk about in the consumer IP cam side, and so that really depends on the inventory situation, how fast they can rebound, but I don't think we can snap back to the original level. We believe some of our video processor business will be replaced by our low-end CV chips too. We are indicating that our video processor business will continue to go down next year, but not at the same scale that we saw this year.

And then I guess my follow-up, and forgive me, I guess it's kind of three here kind. If we look at the growth for fiscal year '25, you said the video processors will still go down. What do you think are the key growth drivers in your CV business that we should look forward to, either when design wins kick in, inventories burn, so cyclically or secularly? Just roughly speaking, what do you see as the biggest tailwind to offset that video processor headwind?

So for the CV side, I definitely believe that both when the inventory burns through, and our new projects like CV5 and CV72 production will help us to get tailwinds to boost our IoT business. Even on the auto side, we believe that new design wins can help us to drive more revenue growth for next year. From the professional IP cam side, it's clear that we hold our market share very well, and as we get the inventory cleaned, we should be able to see a rebound on the current design wins.</br> With the CV5 and CV72 design wins, that should also help.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Tristan Gerra from Baird. Your question, please.

Hi. This is Thera for Tristan. Thanks for taking the questions. Just, you touched on the IoT side of the business, but maybe on the auto side, have you seen any step downs in order patterns from automotive OEMs as they take inventory control measures in the past few months? Do you expect any further order reductions before year-end in auto?

Right. So we did see some small customers trying to reduce their inventory, but it's not as bad as the IoT side. Most of the time, I think our automotive customers continue to take the parts of the plant. Although we see some weakness, it’s not like I said, IoT is really the main problem we are dealing with right now.

Okay. Great. And then for my follow-up, how different are the potential engagements for CV3 given the long-term nature and software platform cost of developing ADAS solutions versus the traditional segments you play, including delivery orders?

The CV3 design win process is taking significantly longer than our previous cycles. In the past, we typically saw design cycles around 18 months, including in the automotive sector. Now, in the auto channel, we are looking at a timeframe of four years. This is why we chose to concentrate on our CV72 and CV3 prospects in China first, as we want to tackle the revenue time-to-market challenge. We expect CV72 revenue to likely begin in the second half of 2025. Additionally, we have a design win with a Tier 1 for the CV3 that could lead to revenue generation in calendar year 2026, which is certainly quicker compared to other areas we are observing.

Okay. Great. Thanks for the questions.

Thank you. One moment for our next question. And our next question comes from the line of Tore Svanberg from Stifel. Your question, please.

Yes. Thank you. Fermi, just back to sort of the resources and the opportunities, and specifically thinking about the CV3, the leveraging software side. We're talking about auto, which is an edge device, but we're also talking about AI accelerators at the core. Just trying to understand how much portability you have with your current investments so you don’t have to go through a completely new investment cycle, if you will?

Right. So, we don't plan to have a brand new investment cycle. With our current resources, we've already built up our software stack in a way that we're ready to demo a brand new software stack that's 100% AI-based very soon. That’s what we discussed in the past, right? We’re working with the Conti software stack, but in parallel, we're developing our own software. With our current resource and the two acquisitions, both Oculii and Parma VisLab, we are at a stage ready to demo our next generation of software stack. From the development point of view, software side, I think we definitely prove that we have enough resources, but we finished the work to some extent. So now the issue with LLM is that we have funded our first phase of LLM investment based on our current resource, and leveraging a lot of investment we’re putting into CV3 software already. For the second phase, we are waiting to see the results of customer engagement; even that ramping up is not going to be a lot more than what we have today. We will be ready to talk to investors about ramping up. From that point of view, you can think that even for the silicon side for LLM, like I said, this is going to be our next phase of CV3 roadmap. So we have to build a next-generation roadmap for the silicon side, leveraging our existing VLSI team. Any new development or new investment cycle for LLM is on the software team to support customers. I hope that clarifies your question.

Yeah. Absolutely. And I also wanted to follow up on, I think it was a previous question about LLM or AI accelerator milestones. So what kind of milestones as investors should we be looking at here? I obviously understand the timing part of it, but what are some of the more specific milestones that we should be keeping an eye on?

I think the first important milestone is that we demo our chatbot demos to our customers, and it will happen sometime in the coming quarter. That’s important because with the demo, it also shows the performance of how we compare to our competitors, and all that information will become open to our customers. I think that’s probably the biggest near-term milestone.

Very helpful. Thank you, Fermi.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Kevin Cassidy from Rosenblatt. Your question, please.

Yeah. Thanks for taking my question. My question is also along the lines of the software stack. With the CV72 in China, how much of the software stack you developed, is there a component of that, and can you sell that software stack too?

Yes. Our strategy regarding software inside China and outside are different. Inside China, we're counting on our software partners because collecting and trending data in China is problematic for us. We are relying on working with our Chinese software partners to deal with CV72. Last quarter, we talked about we already identified multiple software partners, and they are porting aggressively their software to our CV72 platform, ready to demo to OEMs in this quarter. So I think from the China side it’s pretty clear; we know exactly what to do with CV72. Outside China, with CV3, we're collaborating with Conti, but more importantly, we want to demo our own software stack. We don’t plan to bundle 100%, but this is important software, important technology that we can help our customers leverage while we have developed. This software stack will top more next time, but we think our software stack is one of the very few that is 100% AI-based, and we can demonstrate performance and functions that are close to B and C level. I think this is certainly something we need to communicate not only on the technology side but also regarding our business model, we are ready to discuss it in the near future.

Yeah, Kevin. I'll just add that next week, September 5 to 8, Continental will be demonstrating our joint software stack on CV3 at the IAA show, so public demonstration if anyone's in attendance to check it out.

We’ll look for that. And maybe along those lines of demos and your work with Conti, is there any update on how many OEMs you're talking to and any progress at all?

We announced one design win last time, and at this time, we will continue to engage multiple OEMs with potential collaboration with Conti, but also independently with OEMs directly. We continue to have multiple engagements with OEMs at this point.

Okay. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Suji Desilva from ROTH. Your question, please.

Hi, Fermi. Hi, Brian. So thanks for giving us the mix of revenue for the year, roughly between the products, Video, CV2, CV3. Can you give us a sense of what the mix is currently or kind of when it normalizes between auto and IoT? It sounds like those two categories are having different trends right now, and I think it’d be helpful to understand where each of the revenue stands today and maybe in a year or so when things normalize.

Sure, Suji. So if you go back to last year, automotive was about a quarter and IoT was about three quarters. Given the relative stability of automotive this year versus the IoT, which is much more volatile to the downside, that mix is looking more like 70% IoT and 30% automotive for the current year. Obviously, we said that the size of our SAM that we are pursuing over a multiyear period is much more leveraged towards automotive, where we’d be the inverse of that relationship. Long term, we would expect automotive to be up 70% and IoT about 30% as we move out several years in the future as we get traction with CV3 and some of the other automotive products.

Okay. Thanks, Brian. That’s very helpful. And then just trying to reconcile the large pipeline number you’ve been giving for the last several quarters versus the inventory correction here. Is there a timeframe in which some of that pipeline starts to convert and meaningfully contribute? I imagine that that process will be independent of the inventory adjustments that are happening right now, just correct me if that’s wrong, but I’d heard that it’s not pushed out or pulled in any way because of what’s going on right now. Thanks.

I think that talking about the funnel we discussed, for the very near term, for example, if you talk about the funnel for this year, definitely there is some impact from the inventory, but in general, I don’t think the current inventory correction should have an impact on the funnel because it’s really based on design wins and also the probability and the value of the design wins. We'll be ready to talk about this number in November this year.

And Fermi, just give us an idea of what years this starts to kind of come in the elbow of those, how many years away that is?

Well, our funnel is six years, and given the time it takes to land some of these wins, particularly with CV3, it is back-end loaded and definitely in the latter half of those six years.

Okay. Great. Thanks a lot.

Thank you. One moment for our next question. And our next question comes from the line of Gary Mobley from Wells Fargo. Your question, please.

Hey, guys. Thanks for taking my question. If I'm not mistaken, there are about 20 customers that really move the needle for your overall business. Have you had an opportunity to review those top 20 customers and where they stand with respect to inventory balances, whether healthier or not? And to give us a sense of the 20% sequential revenue decline expected for the third quarter. How many customers are driving that down, or is it isolated to just one or two?

In general for IoT, all of the top 20 customers have inventory correction problems, but automotive may not be as bad. Some of the auto customers have inventory problems, but our top auto customers, some of them may not. If you look at any of our top IoT customers, all of them have inventory problems, though at different levels.

I'm sorry, go ahead, Fermi.

I was just saying that they have different degrees of inventory challenges, but all of them have some significant inventories.

Thank you. One moment for our next question. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dr. Fermi Wang for any further remarks.

Thank you for joining us today. We look forward to talking with you soon.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.