Earnings Call Transcript - AMBA Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to Ambarella's Q3 Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Louis Gerhardy, VP, Corporate Development.

Louis Gerhardy, VP, Corporate Development

Thank you, Daniel, and good afternoon. Thank you for joining our third quarter fiscal year 2025 financial results conference call. On the call with me today is Dr. Fermi 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 third quarter of fiscal year 2025. The discussion today, the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth and demand for our solutions, among other things. These statements are based on currently available information and subject to 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 third quarter fiscal 2025 results press release, transcripts, historical results, SEC filings, and a replay of today's call can be found on the Investor Relations page of our website. The content of today's call as well as the materials posted on our website, are Ambarella's property and cannot be reproduced or transcribed without our prior written consent. Before we start the call, we want to inform you of our plans to participate in the following investor events during the fourth quarter. On December 3, we will be at the UBS Global Technology and AI Conference; December 4 at the Wells Fargo TMT Summit; on December 5, we'll be hosting BNP's bus tour; NASDAQ's London Conference on December 10 and 11; Nomura's CES Conference on January 6; and Needham Growth Conference on January 14. And of course, we hope to see you during the multiple sell-side analysts hosted tours at our CES exhibition from January 7 to January 10 in Las Vegas. Fermi will now provide an update for the quarter. John will review the financial results and outlook, then we'll be available for your questions. Fermi?

Fermi Wang, President and CEO

Thank you, Louis, and good afternoon. Thank you all for joining our call today. Our third quarter revenue exceeded the top end of our guidance, reflecting about a 30% sequential increase in both our auto and IoT segments. Company-specific factors significantly offset the broader market weakness, driven by our customers' new product launches, particularly those using our new premium AI processors like CV5. We reached a record level of AI revenue, which contributed to an increased average selling price. We are now projecting fiscal 2025 revenue growth of 22% to 24% year-over-year, revising our earlier estimate of mid- to high teens growth. In our last quarter, we described our new product momentum as waves, and for fiscal 2026, we expect the initial wave from CV5 to continue, supported by the upcoming CV7. We anticipate that both product waves will drive our revenue growth in fiscal 2026, with automotive and IoT sectors growing despite overall market challenges. Our CV3 AD family of SoCs aimed at Level 2+ and high autonomy represents the next phase, with revenue expected to start in calendar year 2026, which corresponds to our fiscal 2027. During the third quarter, we received our first silicon of the CV3-AD655 AI SoC, designed for advanced Level 2+ applications, including mass-market passenger vehicles, and are now providing engineering samples to customers. Despite the pressures facing the global automotive industry, we are optimistic about our automotive business prospects for this year and the next. Our automotive segment consists of two parts: our existing ADAS business and our central domain controller business, known as the CV3 platform. Our existing automotive business, mainly ADAS with a significant share of AI SoCs, is projected to generate around $80 million this year, with a five-year compounded annual growth rate expected to be in the mid-teens. The CV3 platform targets a larger, but still developing, opportunity in Level 2+ and high autonomy, which could substantially increase our five-year automotive revenue growth rate beyond the mid-teens CAGR of our current automotive business. We are diligently pursuing additional CV3 design wins in a challenging automotive environment. Global vehicle production growth is sluggish, Level 2+ market penetration remains low, and there are delays in OEM projects and software development. In light of this environment, we've updated our automotive revenue forecast. Our automotive funnel, which estimates potential revenue over the next six years from fiscal 2026 to fiscal 2031, currently stands at about $2.2 billion, down from $2.4 billion a year ago. One segment represents over $800 million, with a pipeline exceeding $1.3 billion. The challenges in the automotive sector have caused significant fluctuations in our funnel as customer forecasts have shifted. Projects have been delayed or scrapped, new ones added, and some won or lost. Notably, we estimate an additional $2 billion beyond year six is not included in this funnel. We remain hopeful about the long-term demand for Level 2+ and high autonomy and believe our CV3 platform will play a significant role in addressing the challenges faced by automotive OEMs, such as power efficiency, scalability, and an open platform with suitable software IP modules and centralized radar. We continue to focus on securing more CV3 business. Turning to customer activities for the quarter, we note several new models with advanced safety and automation features. Smart Automotive, a venture between Mercedes-Benz and Geely, launched its smart number five model, an electric SUV featuring L2 ADA systems based on our CV2. Xiaopeng, a leading electric vehicle manufacturer in China, introduced the P7+, which employs our 12 video processors for its rearview electronic mirror, now installed in all P7+ units. In the middle market, Honda and Dongfeng's joint venture unveiled the Lingxi L, an electric passenger vehicle equipped with a camera system based on our CV28. Horizon Auto, a brand under Geely, rolled out the Xingzhi H8R light truck featuring an ADAS plus driver monitoring system grounded in our CV22AQ. In our IoT segment, we’ve secured our first customer for the CV server family, marking the onset of the second wave of new product revenue. In the enterprise space, Verkada launched a new generation of cameras, including advanced models based on Ambarella's latest CV72. Bosch unveiled its FLEXIDOME 8100i dome camera, which leverages CV22 for deep learning-based detection in complex environments. Alarm.com introduced cloud cameras based on our CV22, and in Japan, i-PRO added 19 new models to its camera range, all based on CV22. We’re encouraged by the unexpected adoption of our AI SoCs in various IoT markets. Our products, primarily designed for automotive and enterprise applications, are versatile enough to find applications in other IoT sectors. For instance, Insta360 launched the Ace Pro 2 camera, based on our CV5, which allows for 8K video and 50-megapixel photos and boasts AI features like gesture control. Garmin introduced marine cameras based on our CV28 designed for boat docking assistance. Grad, a Singaporean technology firm, unveiled KartaCams 2 for map-making, supported by our CV5, which enables advanced edge AI processing. These customer activities illustrate our strong position in the AI computer vision sector across both IoT and automotive markets. Cumulatively, we have shipped over 25 million edge AI SoCs, paving the way for the launch of our new higher-value SoCs that support more sophisticated edge AI networks. We believe the ongoing expansion of AI training and inference capabilities in data centers for advanced AI networks signals a significant growth opportunity for AI processing at the edge. Our strategic approach aligns well with this and marks the start of our new AI product revenue. We anticipate the second wave to launch concurrently with the first wave next year, followed by another wave commencing in calendar 2026 or fiscal 2027, involving the CV3 and our 2-nanometer platforms. The success of our new products will be crucial for our additional revenue growth next year. We are also pleased to report a return to non-GAAP profitability in Q3. Our focus remains on driving revenue growth and achieving a positive operating margin target of 30% in the long term. We have consistently generated positive free cash flow over the past 15 years, and we are optimistic that our new products will help us continue this trend. John will now elaborate on the Q3 results and the forecast for Q4. John?

John Young, CFO

I'll now review the financial highlights for the third quarter of fiscal year 2025 ending October 31, 2024. I will also provide a financial outlook for our fourth quarter of fiscal year 2025 and ending January 31, 2025. I'll be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense along with acquisition-related costs and restructuring expenses adjusted for the impact of taxes. For fiscal Q3, revenue was $82.7 million, above the high end of our guidance range, up 30% from the prior quarter and up 63% year-over-year. Non-GAAP gross margin for fiscal Q3 was 62.6% at the low end of our prior guidance range due to product mix as we opportunistically drove some revenue upside from certain legacy processors at lower-than-planned margins. Non-GAAP operating expense was $49.1 million, about $900,000 lower than the midpoint of our prior guidance range, driven by continued expense management and the timing of spending between quarters. We remain on track to meet our internal product development milestones. Q3 net interest and other income was $2.1 million. Q3 non-GAAP tax provision was approximately $200,000. We reported a non-GAAP net profit of $4.5 million or $0.11 of earnings per diluted share. Now I will turn to our balance sheet and cash flow. Fiscal Q3 cash and marketable securities increased $6.7 million from the prior quarter to $226.5 million. Receivables days sales outstanding increased from 33 days in the prior quarter to 38 days and days of inventory decreased from 108 days to 94 days. Capital expenditures for tangible and intangible assets were $2.5 million in the quarter and $6.2 million for the nine months ended October 31, 2024. We generated positive operating cash flow of $6.6 million in the quarter and $8.4 million through the first three quarters of fiscal 2025. Free cash flow in the quarter was $4.1 million, with year-to-date free cash flow of $2.2 million. We had two logistics companies representing 10% or more of our revenue in Q3. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia, came in at 66% of revenue for the third quarter. Chicony, an ODM, who manufactures for multiple end customers, was 11% of revenue for the quarter. I'll now discuss the outlook for the fourth quarter of fiscal year 2025. The continued strength of our customers' new product ramps, especially those enabled by our new product wave one from our 5-nanometer CV5, caused us to increase our Q4 estimate. We are expecting a normal seasonal decline in Q4 following the stronger-than-expected Q3. Fiscal Q4 revenue is expected to be in the range of $76 million to $80 million, with IoT and auto, both flat to slightly down sequentially. We expect fiscal Q4 non-GAAP gross margin to be in the range of 61.5% to 63%. We expect non-GAAP OpEx in the fourth quarter to be in the range of $49 million to $52 million, with the increase compared to Q3 driven by CES marketing activities, increased head count, and project-related engineering expenses. We estimate net interest income to be approximately $1.8 million, our non-GAAP tax expense to be approximately $600,000, and our diluted share count to be approximately 41.8 million fully diluted shares. Thank you for joining our call today. And with that, I will turn the call over to the operator for questions.

Operator, Operator

Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Ross Seymore, Analyst

Hi, guys. Congratulations on the strong results and guidance. I guess my first question is really what changed? I know you talked about the different waves and when they're coming, but the inflection point, growing maybe 5% above the midpoint of your range, but an impressive 30% sequentially. And I know you called January seasonal, but it seems like it's even better than seasonal. So what's the activity at your customers that's changing? And I guess what I'm really getting at is I understand it's the new product adoption, but is there also just kind of shipping closer to end demand? So is this the beginning of secular growth? Or is it also bolstered by a cyclical rebound?

Fermi Wang, President and CEO

Thanks, Ross. To start with, our Q3 results indicate that we have recovered from the inventory correction that we experienced earlier. In our previous discussions, we mentioned that the correction would wrap up in the middle of Q3, paving the way for the growth of new products. Currently, Q4 is very much centered on this new product growth. If we analyze our CV5 run rate from two perspectives, we see that both the automotive and IoT markets are expanding. The IoT sector, in particular, is seeing significant growth, especially within the IoT enterprise and other categories, both growing at comparable rates, largely driven by the new product cycle of CV5. In the automotive sector, new partnerships, such as with Sensera for CV2 and Rivian for CV5, are also contributing to our growth. While it's fair to say that in Q3 we bounced back from the inventory correction, Q4's focus on new product lines is crucial for our overall growth strategy. I would also like to highlight that our Q3 revenue stood at $82.7 million, and our Q4 guidance sits at a midpoint of $78 million, which suggests we are anticipating some seasonal variation in Q4.

Ross Seymore, Analyst

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

Fermi Wang, President and CEO

We remain optimistic about the CV3 domain controller opportunity in the market. While our design wins continue to grow, our pipeline has decreased. This is largely due to the overall weakness in the market, particularly within the automotive sector. The adoption rate for Level 2+ is slower than we anticipated. Although we are seeing engagement, many projects are being delayed or even canceled for various reasons. Thus, the adoption of Level 2+ is not progressing as quickly as we expected, which explains the stagnation in our funnel. Nevertheless, I firmly believe that Level 2+ will eventually become a significant part of the automotive market, potentially replacing the existing Level 1 and Level 2 solutions.

Operator, Operator

Thank you. Our next question comes from Tore Svanberg with Stifel. Your line is open.

Tore Svanberg, Analyst

Yes. Thank you. And let me echo my congratulations on the strong results. For me, could you just give us a little bit better sense for the mix here between CV2 and CV5. I mean, I assume not a whole lot of CV7 revenue yet. I think on the last call, you talked about CV5 potentially reaching 1 million units this year. So any more color you can share with us on the mix of CV would be helpful?

Fermi Wang, President and CEO

Right. So maybe let me put some data together to give you some perspective on this. First of all, we talked about our AI revenue being roughly 70% in this quarter. We also discussed that our CV5 is easily going to ship more than 1 million units, probably north of that by a margin. So CV5 is doing well. Our CV5 ASP is anywhere between $25 to $50. That gives you an idea of our CV2 and CV5 contribution. I also want to point out that in Q3, this is the first quarter in the last three years that our video processor revenue grew. I think that's really because the inventory rebound—the inventory correction finished, and customer rebound from that helped the video processor show growth in Q3, but we expect it to go back to gradually decreasing in the coming quarters.

Tore Svanberg, Analyst

Great. And that was actually going to be my follow-up question. So as we think about fiscal 2026 and we think about the cyclical recovery and so on and perhaps even impact the gross margin. So video processing bouncing back is probably more of a temporary phenomenon, and you're not really expecting that to continue to drive a higher mix in fiscal 2026?

Fermi Wang, President and CEO

That's correct. We haven't given any guidance on fiscal year 2026, but we do believe that both IoT and auto will grow in fiscal 2026, and we'll provide more details about gross margin and OpEx in the next conference call.

Operator, Operator

Thank you. Our next question comes from Quinn Bolton with Needham & Company. Your line is open.

Quinn Bolton, Analyst

Hi. Let me offer my congratulations again. I wanted to ask for me, just kind of coming back to the auto pipeline, maybe sort of a follow-up to Ross' question. You talked about some pushouts and maybe even cancellations in Level 2+. Can you give us a sense of what percent of that pipeline is now sort of driven by the Level 2+ opportunities and how that might have changed from the last year's pipeline?

Fermi Wang, President and CEO

Right. So maybe I'll give you a high-level description. I think in the pipeline, we have one aspect and also a projection aspect. In one aspect, I would say CV3 percentage is below 50%. But in the projection aspect, CV3 domain controller is well above 50%. In terms of Level 2+, I would like to add a little more context on that. We believe that when we look at the current price delta between Level 2+ and Level 2 and Level 1, we think the price delta is still high, and that really keeps OEMs worried about introducing a brand-new product at that price point. So I think a lot of OEMs are thinking about how to optimize the price for introducing better Level 2+ functions and features. That's something we think we can help with because we keep telling people that our bond saving for our OEMs is significant compared to our competitors. More importantly, our software can be easily adapted from a high-end Level 2+ to lower Level 2+ products just by really simple modifications. This software compatibility from low-end to high-end Level 2+ will save a tremendous amount of R&D costs for our customers. So I think we are trying to address the pain points our customers are facing.

Quinn Bolton, Analyst

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

Fermi Wang, President and CEO

I think the distribution is pretty fair. In fact, a lot of people think we have a high concentration in China, which is wrong. I would say that 15% of our pipeline is from China. From that, you can see we have probably a little higher percentage in Europe, and everything else is probably well distributed.

John Young, CFO

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

Quinn Bolton, Analyst

Got it. Thank you.

Operator, Operator

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

Christopher Rolland, Analyst

Hey, thanks for the question. Yes, similar to the last one, can you talk about your current geographic mix and why this might have led to outperformance compared to some of your peers, those with EU exposure in particular? And then just tying into this as well, there's a worry that there might be a Chinese EV shift ahead of tariffs, both the EU and U.S. Do you think that will come back to haunt us all in the auto segment at all? Or do you think you're pretty clean from that perspective?

Fermi Wang, President and CEO

Right. So first of all, the exposure I talked about while answering Quinn's question is about the distribution of our pipeline; it's not about the distribution of current revenue. That distribution of current revenue is quite different than the pipeline. So if I understand your question, you're asking whether we have a lot of exposure in different geographic locations, particularly focusing on our current revenue. I would say the majority of our revenue is coming from the U.S., although manufacturing is in Asia. The end market, a big portion is the U.S.. Then there are some revenues from Europe, and Japan and Korea are also significant. In China, we also have 15% of total revenue exposure. So that's how our current revenue is distributed based on geographical locations. Regarding the geopolitical situation, my gut feeling is that if that situation changes, Ambarella is not going to be the only one impacted. Maybe we'll probably see some effect, but not the biggest impact. However, this will change if the geopolitical situation continues to worsen, which I think really depends on how much tighter the rules are going to be. In the worst-case scenario, of course, the whole supply chain gets separated and U.S. components cannot go to China and vice versa. Then we would face a totally different environment and probably need to write off our 15% total Chinese revenue. But I do not think there's anything particularly targeting Ambarella in terms of geopolitical risk. In the past, we had a lot of risk with Hikvision and Dahua, which was about four years ago, but that has passed. Our current revenue exposure is 15%, half from automotive and half from IoT.

Christopher Rolland, Analyst

Thank you for that, Fermi. And then you mentioned something about in the prepared remarks about a legacy processor, I think that continued to sustain and maybe that weighed on margins. I wasn't quite sure there. But maybe talk about that and then when we could get a margin lift in particular in next fiscal year and what the moving parts are for that gross margin lift. Thanks.

Fermi Wang, President and CEO

Yes. Let me point you in the right direction: for example, we did mention our video processor revenue grew in Q3, and that was the first time in the last 10 years. However, when we talk about gross margin, we refer to what we use with the legacy product. So video processors are part of that, and there are other processors in there. But I will say that definitely, that's one reason we start feeling a little pressure on the gross margin side. However, I will point out that the gross margin is really about the mix. Every time our mix changes, we usually see our gross margin move up and down a little bit. But like what we have been saying for quarters, we continue to believe that our gross margin will gradually move into our long-term gross margin model, which is 59% to 62%, and will over time get there.

Operator, Operator

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

Kevin Cassidy, Analyst

Yes. Thanks for taking my question. Maybe a slightly different subject. But can you talk more about your 2-nanometer development, when you expect tape out and the target end markets for those products?

Fermi Wang, President and CEO

Yes. Thank you. First of all, we only started 2-nanometer projects in our engineering road map, and we have engineers working on it. We expect the first 2-nanometer chip to tape out, let me say, in Q4 next year during that period. Of course, the first ship target is for IoT and our enterprise IoT, as well as IoT other sections that will benefit from this. But our 2-nanometer chips are also very important. You should consider 2-nanometer as a family chip, just as we did with 5-nanometer and 10-nanometer. For the 2-nanometer chip, it's important for us to build up our new technology to address the need of new AI platforms and new AI workloads like Gen AI and other types of transformer networks. We definitely will upgrade our architecture based on our 2-nanometer process node.

John Young, CFO

Yes. I mean, we haven't given guidance for fiscal 2026 for OpEx yet. But as Fermi said, we're already amortizing the costs for the 2-nanometer project. I would expect OpEx to increase as an absolute number next year, but the 2-nanometer project is already baked into the run rate.

Operator, Operator

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

David O’Connor, Analyst

Yes. Great. Thank you for taking my question. Maybe two from my side, if I may. Just first, you guys on the auto funnel, again, going from that $2.4 billion down to $2.2 billion. Can you kind of break that out? How much was canceled and then how much was added back in just to give a sense of the relative size of those cancellations? And also kind of on those cancellations, anything you can share geographically about where you saw most of those cancellations? And I have a follow-up.

Fermi Wang, President and CEO

Right. So I think the right word to describe that change is volatile. In fact, it has been volatile for reasons that, first of all, many of our customers pushed out their projects, which reduced the forecast. But definitely, multiple projects got canceled. The majority of the cancellations happened in Europe and the U.S. There were definitely projects that were canceled due to software reasons or other transactions that impacted the roadmap of the company. So I think that definitely is clearly a big portion of the movement of our pipeline. But I would say that we added projects in there based on the engagement of Level 2+. So that's a plus and minus. But one point I want to clarify is that, of course, we have new design wins in there that we already announced, and there are design wins we haven't announced. But there's also a downside, which is mainly for a lot of our projects that we won last year, and their forecasts continue being reduced. Some are reduced by 10%, while others are reduced by an even larger margin. So that's a combination we are dealing with in our pipeline.

David O’Connor, Analyst

Thanks for that. That's very helpful. And just one follow-on. Just on China again, you mentioned—I think John mentioned it was 15% of sales today. You also said that kind of in the pipeline, it's 15% as well. China, but then China is innovating a lot faster. So can you just go back and explain why China isn't higher in the mix? Or where should China land in kind of a steady state in terms of the mix, really? Thanks.

Fermi Wang, President and CEO

Well, first of all, I think John was trying to explain that even when we win a design win from China, the design cycle is usually two to three years instead of five to six years. So every Chinese design win doesn't matter if it's one in the pipeline, it only occupies three out of six years of that funnel. So that's why just from that point of view, China represents a smaller percentage than the reality, because all the other projects like in the U.S. or Europe, or even Japan, Korea, any design win usually is five to six years of pipeline. So I think that's one reason we've indicated that the funnel for China is smaller than it should be.

Operator, Operator

Thank you. Our next question comes from Suji Desilva with ROTH Capital. Your line is open.

Suji Desilva, Analyst

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

Fermi Wang, President and CEO

Yes. In fact, the competitive landscape hasn't changed. Outside of China, globally, we have NVIDIA, Qualcomm, Mobileye, and us—the four companies. In China, you also need to consider Horizon Robotics in that mix. So I think those are probably the companies we're competing against. I think Conti and Bosch continue to play a major role because right now, with all the OEM design wins outside of China, OEMs still want to work with a Tier 1. Our role to OEMs is really providing silicon and sometimes providing software, but they always need a Tier 1 sitting in between. So working closely with Tier 1s continues to be important for us.

Suji Desilva, Analyst

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

Fermi Wang, President and CEO

Absolutely. That's one thing we've really focused on. First of all, we have already introduced our software stack to many people. More importantly, we've shown some of our important customers that using our software stack designed for Level 4 can easily in less than two months be adapted to the Level 2+ type of sensor configuration. This quick adaptation from Level 4 to Level 2+ really helps customers understand that by using our software, they can easily adapt. Our software can, of course, be easily moved from Level 2+ to Level 3 and Level 4. That is important because it significantly reduces their software investment. Secondly, we also have a business model to enable our customers by licensing whatever software module they think they can leverage. For example, we understand we are doing quite well in the perception area, and we definitely believe we are one of the few demoing using HD maps for perception and driving. Those kinds of function features are very welcome. So if any customer wants to use those features, we are open to license and help them integrate their own software stack. I think those are two areas where we can definitely help our customers speed up the software development.

Operator, Operator

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

Martin Yang, Analyst

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

Fermi Wang, President and CEO

Yes. In fact, we talk about how we go into production with CV3, our gross margin is definitely going to be at the low end of our long-term gross margin model. So I think that's because we are competing with the largest possible semiconductor company out there, and we're expecting steep competition. So that definitely will change. However, in the short term, I continue to believe that we will maintain our current gross margin model, which is 59% to 62%. Although we have been running above it for many quarters now, we think we're gradually moving back to that range.

Martin Yang, Analyst

I have a quick follow-up. Regarding the company's overall margin, what factors do you believe will influence the margins? Do you think it will be due to a mix or are there other factors that might have a greater impact on the long-term margin outlook?

Fermi Wang, President and CEO

Yes. If you look at only short-term, quarter-to-quarter, mix is the only reason. Every quarter when our product mix changes, you see that in our gross margin. However, if you look at long-term, I really believe that before we hit CV3, we continually move our strategy to always sell value to our customers. When we move to 5-nanometer, people ask about maintaining our gross margin with the higher cost of 5-nanometer, and we prove that we can. So I think for our current business, particularly in the current IoT and automotive business, we are quite comfortable with our guidance on the gross margin profile. I think CV3 still has time to work on it and collaborate with our supply chain. Although we guided lower than our current gross margin to the low end of our gross margin model, I still think we have time to work on it.

Operator, Operator

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

Richard Shannon, Analyst

Thanks for taking my question as well. There hasn't been a lot of discussion on Gen AI in this call. So maybe, Fermi, if you can talk about the progress here since you announced this initiative just over a year ago. How that's building out here. Maybe if you want to use it in terms of the framework you're talking about with your funnel in the automotive space, talk about it in relation to Gen AI. I guess I'd love to hear about that.

Fermi Wang, President and CEO

In the last four quarters, it has become quite clear to me and the company that Gen AI is going to impact not only just outside our current market but overall current markets will be affected by Gen AI in different ways. In fact, all our customers are looking at how the type of Gen AI model is going to impact their business. So it is important for us to understand what our customers want and engage with them as early as possible. We engaged with them about six quarters ago, and we showed them what we could do starting with N1, and we are still working with several customers on the POC and potentially products. At the same time, as our customers have told us they need to start looking at Gen AI and looking at the clip type functions or other large language models to help their business, we started looking at CV72 or CV75 products, and how those can support our customers. We are pleased to find that the chips, CV72 and CV75 we defined for the enterprise security business can be used to run a large language model, although it's not large, but it's a 3 billion parameter clip type of new network and any derivative of that. So it definitely helps our customers to start looking at how the clip can run on edge devices like cameras. We're talking about a 5-watt chip running a 3 billion parameter model, which is very difficult to find in the market today. More importantly, many of our customers that are traditional security camera service providers, such as consumer or IoT home suppliers like Ring and Nest, announced that they are going to use Gen AI services. In fact, they all announced that they are running clip type neural networks on servers, charging customers $10 a month. We believe we can enable similar services at the edge and significantly reduce the cost of enabling those services. Our Gen AI strategy continues to use N1 and the CV7 family to engage customers, and we believe we're going to see customers implementing clip-type networks onto our CV70 family cameras sometime next year, which will be our first revenue from CV7. We believe that in 2026, we'll see some revenue as we expect. However, the 2-nanometer process is going to play a major role in addressing Gen AI, as we believe to solve Gen AI effectively, we need to move to the most advanced node. We also need to solve both the processing performance and DRAM bandwidth. But I think we do have a plan to address both.

Richard Shannon, Analyst

Okay. A lot of detail there for me. I'll follow up with that one a little bit later. Thanks for all that. My follow-on question here is—so obviously, as you just detailed, there haven't been a lot of discussions about the competitive dynamics, where you're the smallest company out there and probably later to market. What kind of impact do you think all the pushouts that we've seen in the automotive space will have, as exemplified in your funnel change year-on-year here? Do you think this is going to end up being a net positive for you, allowing you to catch up in any manner? Maybe just kind of discuss how these changes in the environment will be beneficial for you?

Fermi Wang, President and CEO

Well, first of all, I think the pushbacks – I said the pushout – stem from the need to get the price right, along with the need for software readiness. Both present opportunities for Ambarella. Our bond costs and lower power consumption enable us to have a much lower cost on battery and power dissipation solutions, which certainly helps. The other point is our software solutions, which we think can help with the reasons for the delays.

Operator, Operator

Thank you. Our next question comes from Gus Richard with Northland Capital Markets. Your line is open.

Gus Richard, Analyst

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

Fermi Wang, President and CEO

Right. So first of all, today, our average ASP, the company-wide average ASP, I would say, is around $12 to $13, and it continues to go up because our CV2 family ASP is around $18 to $19. Our CV5, like I said, ranges from $25 to $50. The ASP for CV7 family—which includes CV75 and CV72—falls between the high teens to probably $30 or $40. So you can see that the trend is definitely that we are building more capability into our chips for AI performance, therefore driving up the ASP. So we continue to expect our ASP growth will be there.

Gus Richard, Analyst

Got it. And then just given the change in administration regarding securing the border and deporting a bunch of people, I would imagine that the demand for security cameras is going to increase. I'm just wondering at this point, are you seeing any uptick from your enterprise customers or potentially government entities?

Fermi Wang, President and CEO

We definitely see that the IoT enterprise continues to grow. In fact, we always said that we believe this year and next year, IoT enterprise will continue to grow in a healthy way for us. I think that might reflect what you said. But I definitely think that the current overall environment will continue to drive security camera growth.

Operator, Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Fermi Wang, President and CEO, for closing remarks.

Fermi Wang, President and CEO

And I would like to thank everyone for participating today and looking forward to seeing you at the various road shows and our CES. Thank you very much.

Operator, Operator

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