Earnings Call Transcript - AMBA Q1 2026

Operator, Operator

Hello, everyone, and welcome to Ambarella's First Quarter Fiscal Year 2026 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. You will hear a message advising your hand is raised. To withdraw your question, simply press star 11 again. Please note this event is being recorded. Now it's my pleasure to turn the call over to the Vice President of Corporate Development, Louis Gerhardy. The floor is yours.

Louis Gerhardy, Vice President of Corporate Development

Good afternoon, and thank you for joining our first quarter fiscal year 2026 financial results conference call. On the call with me today is Dr. Fermi 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 first quarter of fiscal year 2026. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are based on currently available information and subject to uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents we file with the SEC. Before starting the call, I would like to summarize our investor events scheduled for our second fiscal quarter. On June 3, we'll be participating in Bank of America's Technology Conference in San Francisco. On June 17, we'll host Redburn Atlantic's West Coast Bus Tour in Santa Clara. On June 18, we'll host Trivariate Research and NH Investment Securities Bus Tour in Santa Clara. In June, we'll be visiting Baltimore, Boston, and New York City on a non-deal roadshow. Access to our first quarter fiscal year 2026 results press release, transcripts, historical results, and SEC filings, as well as a replay of today's call, can be found on the Investor Relations page of our website. The content of today's call, as well as the materials posted on our website, are Ambarella's property and cannot be reproduced or transcribed without our prior written consent. Fermi will now provide a business update for the quarter. John will review the financial results and outlook, then we'll be available for your questions. Fermi?

Fermi Wang, President and CEO

Thank you, Louis, and good afternoon. Thank you for joining us for our call today. We had an excellent start to the year with the first quarter revenue of $85.9 million, in the upper half of our guidance due to the continued strength in our AI business. Both our five-nanometer CV5 and CV7 product families, as well as our 10-nanometer CV2 product families, contributed to the revenue growth and our average selling price continues to increase as we capture more value per design win. AGI revenue, which we define as a product that integrates one of our proprietary deep learning AI accelerators, was more than 75% of our Q1 revenue. This represents the fourth consecutive quarter of record AI revenue. This achievement demonstrates the execution of our AI strategy in the face of a volatile market. During the first quarter, IoT applications increased mid-single digits sequentially and now represent about three-quarters of our total revenue. Our automotive business declined low single digits sequentially, although automotive revenue was up more than 20% on a year-over-year basis. In our February 26 earnings call, we provided a fiscal 2026 revenue growth estimate in the mid to high teens or approximately $327 million to $339 million. With some conservativeness in our second half outlook due to geopolitical uncertainty. Although the geopolitical uncertainty remains high, we are increasing our fiscal 2026 revenue growth estimate to the range of 19% to 25% or approximately $348 million at the midpoint. While we continue to expect that we will not face a material direct impact from the current tariffs, given the uncertainty of an indirect impact, our larger than normal range of guidance reflects our conservativeness. We are confident in the long-term drivers of our AI strategy and the business remains fully intact. Multiple factors are driving our optimism for the AI market, including my recent discussions with customers and representative customer engagements I'll discuss later in the call, as well as the evolution of our edge AI serviceable available market (SAM). Our SAM is comprised of more than 20 different automotive and IoT edge AI applications with a five-year compounded annual revenue growth rate in the high teens, reaching almost $13 billion in fiscal 2031. In the past, a vast majority of our revenue and our SAM opportunity originated from the edge endpoint market, all the terminal devices in a network. But our new analyses indicate same expansion in the edge infrastructure, all the layers of a network where data from multiple endpoints is aggregated and the incremental advanced AI features and services, such as multimodal visual language models, can be supported. We are already addressing the edge infrastructure market with the N1 family, and we are now developing a new AI SoC product family to enhance our edge AI infrastructure roadmap. By leveraging the silicon architecture and software investment in our low-power and scalable third-generation AI accelerator, we are able to efficiently extend our reach. Over the next few quarters, we will be describing some of the edge infrastructure applications we are targeting in more detail. In April, I attended the IAC West Security Show and met with key customers and partners. Ambarella demonstrated its leadership in GenAI Aggregates, with 18 product demonstrations including the latest Gen AI and Vision AI capabilities. I was very pleased with the high level of customer interest and design activities around our advanced AI products. The demonstrations highlight Ambarella's ability to enable scalable, high-performance reasoning and vision AI applications leveraging our third-generation AI accelerator which now supports most of the leading gen AI models from 500 million to 34 billion parameters. We demonstrated deep six models running on our products at the three different price performance points, including CV75, CV72, and N1655 processors. These demos included advanced multistream video analysis exemplifying how we are pushing the boundaries of real-time AI-powered security and analytics by running state-of-the-art visual language models for both endpoint and on-prem infrastructure. I will now talk about some of our customer product introductions in the quarter. During the quarter, leading enterprise security camera company introduced two new products based on our CV72, operating very high resolution and advanced AI analytics. A third product, a wearable device supporting multiple modalities, was also introduced to the market. This first-of-a-kind product is based on our A6LM video processor. As I described earlier, we are seeing increased traction in the AI market beyond our core enterprise and whole security business. This quarter, IoT Edge examples that demand our AI technology include 360-degree portable video cameras, cyclist cameras, industrial automation, and enterprise video conference. In a portable video camera market, market leader Insta360 introduces a flagship model of 360-degree X5 camera based on Ambarella's five-nanometer CV5. The XY offers 8K video with advanced AI-based image processing. Also in the IoT market, Xiaomi announced its value of you highlight camera for cyclists based on our H32 video processors. In the enterprise IoT industrial automation market, Huawei announced its R5000 series of machine vision co-coder reader, based on our third-generation AI accelerator. The five-nanometer CV75 enables the system to read up to 90 codes per second. Also in enterprise IoT, Norway-based Harlow introduced a new category of multi-camera video conferencing products as part of its integrated system, Europe Expedition. Harlow's new C1 video bar is part of a collaboration with technology giant Lenovo. The end event system is based on our five-nanometer CV72 with 20 times the AI performance of previous generation systems. In our automotive safety and ADAS business, this quarter, we are disclosing wins in China, Japan, Korea, and the US. A leading Japanese OEM will utilize our CV25 SoC in a data logger application. With a CV25 supporting both human viewing and data analytics, the project is supported by a major tier one in Japan with production scheduled to begin this year. Also in Japan, another leading Japanese OEM is utilizing CV25 for a multicamera system providing in-cabin recording and viewing functions, with production scheduled for our current fiscal year. During the second quarter, Zika introduced its double zero seven GT electric vehicle featuring an interactive intelligent B pillar system with two cameras. Our C28 enables access control based on face ID as well as incoming monitoring. Think, we are a leading South Korea provider of smart car information technologies, has entered production with Harmony dual camera recorder based on CV25 supporting ADAS features such as full collision warning, lane departure warning, and the security monitor. In the commercial fleet telematics market, US-based Road Easy introduces RC1 feature in a few view camera based on our CV25. The RZ1 captures clear road and cutting footage to improve fleet safety and accountability. Integrating edge AI, identifying risks like distracted driving, phone usage, and tailgating. You can see that this representative engagement, security remains an important growth market for us. But we are seeing opportunities in numerous other AGI applications with customers in both the auto and the IoT market evaluating and adopting our AI SoCs. As many of you know, roughly five years ago, AGI originated in the enterprise security camera market we were quick to lead the market. Today, we continue to lead the security edge AI market, and we are successfully leveraging our AI portfolio and the market know-how into new application verticals. In fact, security is less than half of our total revenue today, and today's announcement adjusts a subset of new applications we see emerging. Our investment in technology and products is driving today's revenue growth and our future revenue growth opportunities. Our AGI products address the mega trends of safety and security but also automation, which enables end-user productivity to be improved or enables entirely new revenue streams across many markets. While it is still early, AI is fighting its way to the edge. It's not just a data center or hyperscaler opportunity anymore. Ambarella is the leader in AI with more than 32 million AI processors shipped on a cumulative basis. We are the established AI technology provider uniquely focused and positioned for the rapidly evolving AI market. We continue the pace of rapid innovation. Our product portfolio and roadmap are highly differentiated and offer the flexibility and scalability to target increasingly diverse applications, both enterprise and consumer-driven markets, and the closed edge endpoints as well as edge infrastructure. As I wrap up today, I want to reiterate the important points we share today. One, we delivered strong Q1 results with similar strength projected into Q2. Two, we increased our fiscal 2026 guidance while maintaining a conservative second-half stance. Three, our higher value higher ASP products are seeing strong momentum. Four, we have a strong outlook with the new AI market development. Five, we are the established AGI market leader who is innovating at the right pace. Of course, the geopolitical uncertainty can be a distraction, but to deal with it, I feel it is important to remain agile and to be prepared for short-term surprises, while focusing on what we can control, and most importantly, continuing investment in innovation and market development, which is most critical for our success. Financially, while we have generated positive free cash flow for sixteen consecutive years, our goal is to develop the technology, products, and customers that result in positive earnings leverage and growth in our free cash flow. John will now discuss the Q1 results and the Q2 outlook in more detail. Thank you, Fermi.

John Young, CFO

I'll now review the financial highlights for the first quarter fiscal year 2026, ending April 30, 2025. I will also provide a financial outlook for our second quarter of fiscal year 2026 ending July 31, 2025. I will be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. In terms of fiscal Q1, revenue was $85.9 million, above the midpoint of our prior guidance range, up 2.2% from the prior quarter, and up 57.6% year-over-year. Sequentially, automotive revenue declined in the low single digits while IoT increased in the mid-single digits. Non-GAAP gross margin for fiscal Q1 was 62%, slightly above the midpoint of our prior guidance range, due to a favorable product mix. Non-GAAP operating expense in Q1 was $51.8 million, slightly above the midpoint of our prior guidance range of $50 million to $53 million due in part to higher engineering costs on new and existing chip development projects. Q1 net interest and other income was $2.2 million, compared to our prior guidance of $1.8 million. The increase was primarily from higher other income. Q1 non-GAAP tax provision was approximately $600,000. We reported a non-GAAP net profit of $3 million or $0.07 of earnings per diluted share in Q1. Now I will turn to our balance sheet and cash flow. Fiscal Q1 cash and marketable securities reached $259.4 million, increasing $9.1 million from the prior quarter and $56 million from the same quarter a year ago. Increased cash and marketable securities benefited primarily from working capital improvements associated with increased revenue during the quarter. Receivables days sales outstanding decreased from thirty-three days in the prior quarter to thirty-one days, while days of inventory increased one day to ninety-eight days. Compared to the prior quarter, our inventory dollars increased 14% to support our customers' strong demand outlook for our products. Operating cash inflow was $14.8 million for the quarter. Capital expenditures for tangible and intangible assets were $4.6 million for the quarter. Free cash flow was $10.2 million for the quarter. During the second quarter of fiscal year 2020, Ambarella's Board of Directors approved an extension of the current share repurchase program for an additional twelve months ending June 30, 2026. During the first quarter, we purchased 24,152 shares of our stock for total consideration of approximately $1 million. As of today, there's approximately $48 million available under our repurchase authorization. We had one logistics company representing 10% or more of our revenue. WT Microelectronics, a fulfillment partner in Taiwan, shipped to multiple customers in Asia, accounting for 63.1% of revenue for the quarter. I'll now discuss the outlook for the second quarter of fiscal year 2026. Demand for our edge AI inference processors remains strong. We anticipate fiscal Q2 revenue in the range of $86 million to $94 million or $90 million at the midpoint. Expect mid-single-digit sequential revenue growth in IoT applications with automotive revenue expected to be slightly up compared to the prior quarter. For fiscal 2026, we anticipate a revenue growth range of 19% to 25%. We expect fiscal Q2 non-GAAP gross margins to be in the range of 60.5% to 62%. We expect non-GAAP operating expenses in the second quarter to be in the range of $52.5 million to $55.5 million with the increase compared to Q1 driven by new product development costs, including a new AI SoC addressing the emerging IoT edge infrastructure opportunities described earlier by Fermi. We also anticipate a weaker US dollar to have a moderately unfavorable impact on our operating expenses in the second quarter. We estimate net interest and other income to be approximately $1.8 million, our non-GAAP tax expense to be approximately $800,000, and our diluted share count to be approximately 42.6 million shares. Thank you for joining our call today, and with that, I will turn the call over to the operator for questions.

Operator, Operator

Thank you so much. And as a reminder, that is star 11 if you do have a question, and wait for your name to be announced. To remove yourself, press star 11 again. One moment for our first question. It comes from the line of Christopher Rolland with Susquehanna. Please proceed.

Christopher Rolland, Analyst

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

Fermi Wang, President and CEO

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

Louis Gerhardy, Vice President of Corporate Development

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

Christopher Rolland, Analyst

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

Fermi Wang, President and CEO

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

Christopher Rolland, Analyst

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

Operator, Operator

Thank you. Our next question is from Tore Svanberg with Stifel. Please proceed.

Tore Svanberg, Analyst

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

Fermi Wang, President and CEO

Right. So I think, you know, if you look at how the devices are distributed, at the top is really a data center and cloud. At the bottom are the edge endpoints, which is where we are serving our customers. But now it has become clear with so many different AI models happening that you just cannot upgrade to the endpoints fast enough. Of course, our customers continue to use the endpoints with new products or new cameras that we can run efficient advanced AI models on. But to upgrade the existing base, you can imagine that there are servers or AI boxes that can integrate all the existing endpoints and aggregate video input to run the best model on that box. That would be the easiest way to upgrade the installation. I think this is just an early trend that we're seeing, and we believe that there is momentum on that. In the future, there will be many other on-prem servers that will walk a user solution too.

Tore Svanberg, Analyst

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

Louis Gerhardy, Vice President of Corporate Development

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

Tore Svanberg, Analyst

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

Operator, Operator

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

Kevin Cassidy, Analyst

Yes. Thanks for taking my questions, and I'll also congratulate you on great results. But, yeah, speaking of those results, do you think with the strong product cycle that you're in, could there be a change in your seasonality? Maybe as the human interface devices become less relevant in your revenue?

Fermi Wang, President and CEO

Yeah. You are asking about our CV products versus human viewing products? Just a question with regard to whether our seasonality might not have as much impact. Right? So I think for this year, I think with so many uncertainties regarding the geopolitical situation, that seasonality is definitely a question mark for us. Although we are not saying there's no regular seasonality, we'll just say that we provide a broader range for the annual guidance to indicate there's uncertainty in the second half. But I think there's definitely a scenario that normal seasonality can happen.

Kevin Cassidy, Analyst

I see. And you've piqued our interest mentioning these new edge devices, and you know, in these are all your transformer-based SOCs. Go ahead.

Louis Gerhardy, Vice President of Corporate Development

I think the question was correct me if I'm wrong. Kevin. It was a little bit hard to hear you. On the edge infrastructure. Is it that we expect that market to leverage our third-generation AI accelerator to a high degree? And the answer is yes. Obviously, because right now, the first already announced N1655 this year for that particular market. But we also understand the need for the customers who are going to build another chip for the family of the product so we can deliver a full complete roadmap for the customer. All the chips we're talking about today are still leveraging our third-generation CVflow architecture and the software to minimize our investment but at the same time provide a very competitive solution in the market. More importantly, I think as you know, that third-generation architecture can redo all of the advanced AI models based on transformers.

Kevin Cassidy, Analyst

Okay. Great. Exciting products. Looking forward to hearing.

Operator, Operator

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

Joe Moore, Analyst

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

Fermi Wang, President and CEO

Oh, auto continues to be a focus. But I think, you know, with our current approach for auto is we only build a complete CV3 automotive series, as you know, we have a 685, 655, and the 635. That's the company lineup for the account driving software. We're continuing to invest in our software side both for the lab driving software stack and the ultralight radar software stack. So that doesn't change. However, with the finalize OECV3 family for the automotive roadmap, we definitely have resources that we're going to allocate to edge infrastructure. We also talk about adding another project, which is not in our annual plan, but we think we saw our revenue growth. We have a chance to build another silicon for edge infrastructure, which we are doing. So we have definitely added a little bit more to improve our strength in this edge infrastructure business.

Joe Moore, Analyst

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

Fermi Wang, President and CEO

Yes. In fact, we are investing the resources. Let me maybe go a little bit deeper than before. The way we look at robotic patients today is we view that market very similarly to autonomous driving five years ago. What that means is that most of our customers are trying to find the most efficient solution, but they are still trying to piece different pieces of the solution together to build a prototype. Because the size of the market for each customer is still small. So we are starting to see people trying to use one box for the video perception, the other box for radar perception, and using a CPU to integrate them together. This really reminds me of five years ago when the first generation of level two cars came out; it’s a similar architecture. We are back in that stage right now, and we already have solutions like CV5, CV7 to provide for video perception and radar perception for those kinds of solutions. However, we also believe, just like autonomous driving cars, that for high-volume robotic applications, you need a domain controller and an end-to-end AI software to drive this application. So we're going to use our CV3 solution to compute and drive these applications. But everything we're doing for this AI infrastructure, you can imagine that it can also help the robotic solution. More importantly, if this is talking about silicon and sulfur, when we go to market, you're going to start seeing, maybe in the next quarter, we're just going to start introducing an idea of how we're going to change our go-to-market because we realize that in the past, we focused on addressing large customers. Now we see that there's a robotic application. The customer market is very segmented, and most customers have small volumes. So we need to find a different approach, a go-to-market approach to address this need. We're definitely going to start talking about that approach next quarter.

Louis Gerhardy, Vice President of Corporate Development

Hey, Joe. It's Louis. Just to wrap some part numbers around that. So for the co-processing, like say, the perception, that would be parts like CV5 or CV7. And then, of course, the central brain, the domain controller for me, was referring to would be the end family of products.

Joe Moore, Analyst

Great. Thank you so much.

Operator, Operator

Thank you. One moment for our next question, and it's from Suji Desilva with ROTH Capital. Please proceed.

Suji Desilva, Analyst

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

Fermi Wang, President and CEO

Right. So maybe let me help you with a number that I'm thinking about. If you look at the aggregate current camera space, that's using security camera as an example, there are roughly 1.2 billion installed base cameras, which you need to upgrade. Either upgrade by a new camera with advanced AI technology or upgrade with info the so-called edge infrastructure box. Those kinds of boxes usually integrate, I would say, sixteen to thirty-two different cameras into a box. The content for that box is in the low three digits. So that I hope gives you an idea of how we look at this market opportunity.

Louis Gerhardy, Vice President of Corporate Development

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

Suji Desilva, Analyst

No, that's great. Understood. And then my other question, around the edge infrastructure market as you're going into this, how does the competitive landscape maybe shift? Some perspective there versus things like FPGAs, GPUs, CPUs that already target that market? Do you think about the competitive landscape differently, or is it similar? Thanks.

Louis Gerhardy, Vice President of Corporate Development

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

Fermi Wang, President and CEO

Yep.

Louis Gerhardy, Vice President of Corporate Development

Okay. In particular, those that use cameras.

Suji Desilva, Analyst

Got it. Thanks, guys.

Operator, Operator

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

Shadi Mitwalli, Analyst

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

Fermi Wang, President and CEO

Talking to our customers about our supply situation. We continue to have conversations. One of the worries last time we talked about was whether our customers were building up inventories. I think that we continue to have that conversation with customers. All of them told us that they are not building inventory. In fact, they are watching the situation and are really eager to build any inventory at this point. So from that point of view, I think we feel comfortable with that. However, there's still always a geopolitical situation. Every day, we know things can change. So we cannot speak for what we don't know in the next second half. So that's where our uncertainty is.

Shadi Mitwalli, Analyst

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

John Young, CFO

Yeah. So from any quarter to quarter, it's really a combination of customers and product mix. That is the primary driver of how that corporate gross margin rolls up. So ordering patterns of different customers and their contribution is really the primary driver for any one quarter's gross margin guide.

Shadi Mitwalli, Analyst

Got it. Thank you.

Operator, Operator

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

Gus Richard, Analyst

Yes. Thanks for letting me ask a couple of questions. You know, the video management systems that the 32 cameras or 16 whatever are attached to, those are coming out with obviously, AI capabilities, and the camera has AI capabilities. And I've been wondering if you could help me understand how that AI split happens and why you need it in both places.

Fermi Wang, President and CEO

Right. So the quick answer to that is, you know, with the existing installed base, you just cannot replace all the installed base cameras fast enough with the advanced AI cameras. To enable the installed base with advanced AI models, this kind of box is required, and that's probably the easiest way to upgrade. The second answer is with a lot of different AI improvements, I can imagine that in the future, you'll continue to see more and more advanced models coming up. The camera can run a portion of it, but every time a new camera comes out, it becomes easier to upgrade the service with a box approach. So the combination of these two really drives the upgrade cycle.

Louis Gerhardy, Vice President of Corporate Development

Hey, Gus. It's Louis. Just to add some comments John kind of touched on it earlier, but you could have CV2-based cameras in the field doing detection and classification with CNN networks. Then you could provide an incremental layer of service with one of our GenAI chips that could accommodate much larger parameter models. On the infrastructure side, the point of aggregation. So, you know, maybe that's one example of how it would be architected.

Gus Richard, Analyst

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

Fermi Wang, President and CEO

You know, when we talk about our numbers, we don't include China anymore in any security card market. In terms of market share, outside China, I would say we definitely have a majority of the market share for security cameras in the mid to high end. On the low end side, there are plenty of Chinese and Taiwanese suppliers trying to compete with the low end with $2 to $3 chips, which we don't compete there. If you look at the separation of the line with the mainstream high-end to the low to the low end, on the top, we are probably the majority leader and on the bottom, we're just one of the players.

Gus Richard, Analyst

Got it. Thanks. That's helpful.

Operator, Operator

Thank you. And as a reminder, to our teleaudience, if you do have a question, simply press star 11 to get in the queue. Okay, we have a question from the line of Martin Young with Oppenheimer. Please proceed.

Martin Yang, Analyst

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

Fermi Wang, President and CEO

It's the first case. In fact, we've talked to so many customers and what they need, we realized that a one six five five is great for the first product. But we do need to have a second chip to keep competitive. I think that second chip, however, is leveraging our current CV3 third-generation CV4 architecture and software. So the development is going to be fast. The cost will be we think can be easily controlled, but the added value is really helping customers have better performance per watt and higher performance in a sense silicon.

Martin Yang, Analyst

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

John Young, CFO

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

Martin Yang, Analyst

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

Operator, Operator

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

Fermi Wang, President and CEO

Thank you all for joining us today, and I look forward to talking to you next time. Bye.

Operator, Operator

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