Ambarella, Inc. (AMBA) Q3 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The company shows strong revenue growth potential and optimistic guidance, particularly in edge AI and IoT markets. Despite slower automotive project timelines, high demand in drones and wearable cameras, along with a strategic focus on AI and robotics, indicate strong future prospects. While management avoided specifics, the overall sentiment is positive, with growth opportunities outweighing uncertainties. The market cap suggests moderate volatility, supporting a positive stock reaction.

Key Financial Performance

Revenue $108.5 million, up 31.2% year-over-year. The increase was driven by growth in automotive and IoT sectors, particularly the adoption of edge AI in enterprise security and portable video applications.

Non-GAAP Gross Margin 60.9%, slightly above the midpoint of the prior guidance range of 60% to 61.5%. This was due to favorable product mix.

Non-GAAP Operating Expense $55.3 million, slightly below the midpoint of the prior guidance range of $54 million to $57 million. The reduction was not explicitly explained but indicates controlled spending.

Non-GAAP Net Profit $11.9 million or $0.27 per diluted share. This reflects improved profitability due to increased revenue and controlled expenses.

Cash and Marketable Securities $295.3 million, up $68.8 million year-over-year. The increase was primarily due to operating cash flow associated with increased revenue.

Operating Cash Inflow $34.3 million for the quarter, reflecting strong cash generation from operations.

Free Cash Flow $31.4 million, indicating efficient cash management and profitability.

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Operating Highlights

Edge AI Revenue: Achieved record quarterly revenue of $108.5 million, with Edge AI revenue accounting for 80% of total revenue. This marks the sixth consecutive quarter of record Edge AI revenue.

New Product Developments: Introduced products like CV28 for India's security camera market, CV72 for Bosch's AI-powered cameras, and CV75 for Verkada's facial recognition access systems. Expanded into portable video markets with products like Arashi's 8K action camera and body-worn cameras.

Automotive Safety and ADAS: Key wins include Zeekr's in-cabin DVR system, Xpeng's driver management system, and Solera's AI-powered smart camera.

Market Expansion in India: Collaborated with Sparsh to penetrate the indigenous 'Made in India' security camera market.

Aerial Drone Market: High-volume shipments into the aerial drone market are expected to commence this quarter, marking the beginning of a large robotic market opportunity.

Revenue Growth: Increased fiscal 2026 revenue guidance to a range of 36%-38%, approximately $390 million at midpoint, up from prior guidance of 31%-35%.

Gross Margin: Non-GAAP gross margin for Q3 was 60.9%, slightly above the midpoint of the guidance range.

Cash Flow: Operating cash inflow was $34.3 million for the quarter, with free cash flow at $31.4 million.

Focus on Edge AI: Committed to expanding Edge AI applications across enterprise security, automotive safety, smart home, and portable video markets.

R&D Investment: Continued heavy investment in proprietary edge AI SoC technology to address a $12.9 billion serviceable available market by fiscal year 2031.

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Risk or Challenges

Revenue Dependency on WT Microelectronics: WT Microelectronics, a logistics company, represented 70.2% of revenue for the third quarter, indicating a significant dependency on a single partner for revenue generation. This concentration poses a risk if there are disruptions or changes in the relationship.

Seasonality Impact on Revenue: The company expects a mid- to high single-digit decline in both automotive and IoT businesses in Q4 due to seasonality, which could impact overall revenue and profitability.

R&D Investment Pressure: The company remains highly committed to R&D investments to address the large edge AI market opportunity. While this is strategic, it could strain financial resources if revenue growth does not meet expectations.

Supply Chain and Manufacturing Risks: The company relies on advanced VLSI technology and specific nanometer-based products (e.g., 5nm and 10nm). Any disruptions in the supply chain or manufacturing processes for these technologies could adversely affect product availability and revenue.

Market Competition and Pricing Pressure: The edge AI market is still in its early stages, and increasing competition could lead to pricing pressures, potentially impacting margins and market share.

Customer Concentration Risk: A significant portion of revenue is derived from a few high-volume customers. This concentration increases vulnerability to changes in customer demand or relationships.

Economic and Geopolitical Uncertainties: The company operates in global markets, and economic or geopolitical uncertainties could impact demand, supply chains, and overall business operations.

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Guidance & Outlook

Revenue Guidance for Fiscal Year 2026: Ambarella has increased its fiscal 2026 revenue guidance, projecting an all-time fiscal year total revenue record. The updated revenue growth guidance is in the range of 36% to 38%, approximately $390 million at the midpoint, compared to the prior estimate of 31% to 35% growth or approximately $379 million at the midpoint.

Edge AI Market Opportunity: The company forecasts a large edge AI serviceable available market (SAM) of $12.9 billion by fiscal year 2031. Ambarella remains committed to R&D investments to address this market opportunity and maintain its leadership position.

Q4 Fiscal Year 2026 Revenue Outlook: Revenue for Q4 is forecasted in the range of $97 million to $103 million, with a midpoint of $100 million. This reflects a mid- to high single-digit sequential decline in both automotive and IoT businesses due to seasonality.

Q4 Fiscal Year 2026 Gross Margin Outlook: Non-GAAP gross margin for Q4 is expected to be in the range of 59% to 60.5%.

Q4 Fiscal Year 2026 Operating Expenses: Non-GAAP operating expenses for Q4 are projected to be in the range of $55 million to $58 million, driven by employee-related and CES expenses.

Product Roadmap and ASP Growth: Ambarella anticipates further increases in average selling prices (ASP) as its third-generation AI SoCs and other new products become a more material portion of revenue. The company is also expanding its product roadmap to include edge infrastructure and auto autonomy, which are expected to boost ASP.

High-Volume Shipments in Aerial Drone Market: High-volume shipments into the aerial drone market are expected to commence in Q4, marking the beginning of the company's realization of the large robotics market opportunity.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:How much of the 36% to 38% growth for fiscal '26 is driven by unit versus ASP?

A:Both unit and ASP growth contribute to the growth, with an approximate split of half and half. Unit growth is driven by the CV side, while ASP growth is significant due to advanced technology.

Q:Can you provide more details about the portable video market and its growth potential?

A:The portable video market includes action sports cameras, panorama cameras, drones, wearable cameras, web cameras, and video conferencing products. This market has shown significant growth and momentum, surprising management with its size. The company aims to secure and grow its market share in this area.

Q:What is the split between consumer and enterprise in the Edge AI/IoT business?

A:The split is roughly 50-50 between enterprise CapEx-driven markets and consumer markets. Within the consumer segment, there are durable goods like smart home cameras and more volatile discretionary items.

Q:What are the factors affecting gross margin and its outlook for next year?

A:Gross margin is influenced by the contribution of high-volume customers. The long-term target is 59% to 62%, but margins may vary depending on customer mix. Management is not opposed to lower margins for specific high-volume opportunities but aims to stay within the target range over the long term.

Q:What are the new elements in the drone market that could drive higher content over time?

A:The company is focusing on video technology, particularly panorama cameras, and autonomous capabilities for drones. The market is expected to grow with opportunities in consumer video capture and commercial applications. Autonomous drones requiring powerful chips and AI are seen as a key growth driver.

Q:What is the update on the infrastructure opportunity and the N1 655?

A:The company has announced its first design wins and continues to see strong interest and design activity for both video-centric and non-video-centric products. They are committed to this market and plan to expand their roadmap.

Q:What is the progress in the home security market with AI feature integration?

A:The company has design wins with the CV75, but the market is price-sensitive and developing slower than expected. They are focused on edge AI solutions for this market.

Q:What is the company's approach to the humanoid robot market?

A:The humanoid robot market is a long-term opportunity. The company is providing solutions for video technology and central processing for robotics. They see intermediate steps leading to humanoid robots and are investing in hardware and software for this market.

Q:What are the highest growth opportunities in the Edge AI market for calendar 2026?

A:Drones and wearable cameras are highlighted as high-growth areas. Wearable cameras are expanding beyond police use to commercial applications. Edge infrastructure is also seen as a long-term growth area.

Q:Is there visibility in the drone market beyond consumer and commercial applications?

A:Most customers are focusing on consumer and commercial applications, with limited focus on government or military usage.

Q:What is the growth and contribution of customers like Arash in the IoT market?

A:Arash is the largest customer, with revenue roughly doubling year-over-year. They use multiple chips and sell to multiple ODMs, making it difficult to track exact contributions.

Q:Are drones using image processing or AI for autonomous flying capabilities?

A:Drones are using both image processing and AI for autonomous flying capabilities, including object avoidance and navigation.

Q:What is the company's approach to the automotive market, particularly Level 2+ and Level 3?

A:The company remains committed to the automotive market, engaging with multiple OEMs and Tier 1s for Level 2, Level 2+, and Level 3 autonomous driving. They plan to provide more guidance on this market in the next quarter.

Q:How does the mix of high-volume customers affect gross margin beyond Q4?

A:The mix of high-volume customers will continue to impact gross margin. Management does not provide guidance beyond Q4 but notes that this dynamic will remain a factor.

Q:Will OpEx grow at a slower pace than revenue in fiscal '27?

A:Management expects to create operating leverage by having revenue and gross profit outpace OpEx growth over the long term.

Q:How much of the software and development for automotive can be applied to robotics?

A:A significant portion of hardware and software development for autonomous driving, particularly in sensor fusion and perception, can be applied to robotics, including drones and other applications.

Q:What was the consumer versus enterprise mix in the IoT business last year?

A:The dominant part of the mix last year was enterprise CapEx-driven markets.

Q:Does the increased consumer business change the company's seasonality?

A:Yes, the increased consumer business may change seasonality. Management suggests looking at a 10-year average for a more normalized view of seasonality.

Q:How should taxes be modeled for the next year and beyond?

A:Taxes should be modeled in dollar terms rather than percentages, with an increase in dollars expected as revenue grows.

Q:Review of Unclear Management Responses

A:Management avoided providing specific numbers or detailed guidance in several areas, including the exact split between unit and ASP growth, the future mix of high-volume customers affecting gross margin, and OpEx growth for fiscal '27. Additionally, they did not provide a clear timeline for the development of the humanoid robot market or detailed updates on the automotive funnel, deferring these discussions to future quarters.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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Ambarella's earnings call highlights strong revenue growth estimates, record AI revenue, and a positive outlook on edge AI and IoT applications. The Q&A section supports this with positive customer feedback and strong growth expectations in IoT and automotive sectors. Despite some vague responses on industry consolidation, the overall sentiment remains upbeat. The market cap suggests a moderate reaction, leading to a positive stock price movement prediction.

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