Ambarella, Inc. (NASDAQ:AMBA) Q2 2024 Earnings Call Transcript
Ambarella, Inc. (NASDAQ:AMBA) Q2 2024 Earnings Call Transcript August 29, 2023
Ambarella, Inc. beats earnings expectations. Reported EPS is $0.15, expectations were $-0.21.
Operator: Thank you for standing by, and welcome to Ambarella's Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Louis Gerhardy, Vice President, Corporate Development. Please go ahead.
Louis Gerhardy: Thank you, Jonathan. Good afternoon, and thank you for joining our second quarter fiscal year 2024 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO, and Brian White, CFO. The primary purpose of today's call is to provide you with information regarding the results for our second quarter fiscal year 2024. The discussion today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions among other things. These statements are based on our currently available information and subject to risks, uncertainties, and assumptions, should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements.
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We're under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risk factors that could affect our financial results are more fully described in the documents we filed with the SEC. Access to our second quarter fiscal 2024 results press release, transcripts, historical results, SEC filings, and a replay of today's call can be found on the Investor Relations page of our website. The content of today's call, as well as the materials posted on our website are Ambarella's property and cannot be reproduced or transcribed without our prior written consent. Fermi will now provide a business update for the quarter, Brian will review the financial results and outlook, and then we'll be available for your questions.
Fermi Wang: Thank you, Louis, and good afternoon, everyone. Our fiscal Q2 revenue was approximately flat sequentially and consistent with our guidance. Our AI business grew sequentially and year-over-year, while our Video Processor business was down sequentially and down about 50% from a year ago. Our blended ASP in Q2 was above $12 and is on track to grow about 20% year-over-year. Thanks to the reach and mix of AI SoCs, highlighting the value of our emerging AI Inference Processor (ph) business. Our mid-to-long-term growth outlook for the AI Inference Processor business remains positive. However, the near-term environment is very challenging for our overall business. Customers are now more aggressively reducing their inventory and we are now seeing some pockets of weak end-market demand, which complicates our customers' ongoing inventory reduction efforts.
Given this, we have reduced our second half outlook. We are not expecting a recovery in calendar 2023, but we do anticipate our customers' inventory will normalize by the end of the year and set us up for a return to growth in calendar 2024. We continue to expand our position in the rapidly evolving AI inference processor market. Cumulatively, we have shipped more than 17 million AI inference processors into device and end point for IoT and automotive applications, and we are now expanding our AI inference processor reach into vehicle autonomy. As announced on the last earnings call, we continue to evaluate the AI inference accelerator market opportunity. I will now summarize the status of our three major SoC product families, Video Processors, CV2, and CV3.
First, Video Processors are human viewing, I expect it to be about 40% of total revenue this year, down from 55% last year and they typically come in a single-digit ASP. For several years, we've been prioritizing our limited resource on AI technology and products and for this reason we anticipate our video processor revenue to continue to contract. However, the revenue impact from the video processor contraction in fiscal year 2025 is anticipated to be significantly lower than what we are experiencing this year. Second, our CV2 family of SoCs establish Ambarella’s in the AI inference market and this SoC are expected to approach 60% of our total revenue in fiscal 2024, up from 45% last year. This family of AI inference SoC commences and ASP close to $20 and serves computer vision applications for auto and IoT.
CV2 remains an important growth market for Ambarella in mid-to-long term. Third, our CV3 family SoC first began to assemble a year ago. Based on our third-generation AI inference technology, this SoC target more challenging AI inference workload such as partial or complete mobile system autonomy. The CV3 family SoC range from $50 to more than $400 per SoC and autonomous driving software stack optimized to run on CV3 can add hundreds of dollars per unit of incremental software value. The AI inference processor embedding our CV3 SoC is a starting point for our evaluation of the Gen AI acceleration market. In the last quarter, we began to port Meta's Llama 2 to the CV3 ADI and we expect to have chatbot demos available later this year. We will provide updates on our continuing evaluation and encourage to see Generative AI opportunities emerging on both the server and the device side of the market.
I will now summarize representative customer activity in the quarter. Design activity in the enterprise security camera market remains robust at medium customer worldwide. Motorola introduced its H5A multi-sensor camera based on our CV2 AI SoC. The camera offers up to 360-degree view utilizing through four image sensors with upto 32 mega pixel resolution and AI analytics. Axis, a unit of Canon announced the 2 megapixel M4215 cameras and the 4K M4218 cameras both based on our CV25 AI inference -- SoCs, targeting indoor surveillance applications. Japanese market leader, i-PRO, announced the expansion of its Rapid PTZ X-Series and S Series with 16 new models based on our CV25 and CV22 AI inference processors. DynaColor introduces Smarter Q next-generation multi-directional camera using our CV5 AI processor to support four 5-megapixel sensors.
And in South Korea, Hanwha launched three new bi-spectrum AI cameras based on our CV2 AI SoC. These cameras provide 4K video and thermal view simultaneously for the rapid detection and the classification of vehicles or insurers. I will now talk about representative customer activity in Automotive market. In our May 30 earnings call, I mentioned the positive feedback we received at the Shanghai Auto Show for our CV72AQ AI inference processor, a derivative over the CV3 family of SoCs. During Q2, this is a Tier 1 in China and I am pleased to report multiple Tier 1 wins for Level 2+ applications. We expect some of this Tier 1 projects to commence production in the second half of the calendar year 2025. We are pleased to announce our first CV5 win in passenger vehicle.
We expect this win to enter production in the next 12 months. In this application, the CV5 will support AI inference processing for multiple cameras. Additionally, in July, GAC Motor in China unveils its hyper GT intelligence coupe, including an L2+ ADAS intelligent driver assistance system based on our CV22AQ. And recently, the Chinese government has a new policy allowing camera monitoring system, CMS to replace conventional left and the right side mirrors. The policy also covers interior rear mirrors with a CMS enabled the models being legal, beginning in July 2023. This CMS system represent a significant opportunity for Ambarella's CV2 family of AI inference processors. During the quarter, BAIC, one of the largest automotive OEMs in China began selling SUVs equipped with the CMS system based on our CV22AQ.
In the automotive aftermarket, Toyota introduced its wireless backup camera system for trailers based on our H32AQ video processor. The camera will be an option for Toyota's model year 2024 Sequoia and Tundra trucks. Canopy, the startup resulting from Ford and ADT's 2022 joint venture introduced its first product, the Canopy Pickup Cam based on our CV25 AI inference processor. The camera provides a full HD recording, 180 degree field of view, person detection, and Reach-in detection for the back of a pickup. And in June, action camera maker, Insta360 announced its GO 3 camera, a lightweight, but powerful 2K camera that utilizes our H22 video processor. These representative engagements indicate a healthy pace while continuing customer design activity for AI inference processors.
Our investment strategy is aligned with the anticipated market demand for more sophisticated software intensive AI influence applications. In the last three years, thanks to the CV2 family, we have demonstrated the ability to capture more value per win with customer demand migrate to AI from video processors. Looking forward, we believe our newer products such as the CV5, CV72 and CV3 are well-positioned to support the increasingly sophisticated AI inference workload our customers are anticipating. This new product ramp and as we also capture more software value, we anticipate our blended ASP will continue to rise. While actively managing expenses through the current market turmoil, we will continue to drive our strategic R&D investments to fully realize the AI inference market opportunities we have discussed today.
With that, Brian will now discuss the Q2 results and outlook in more detail.
Brian White: Thanks, Fermi. I'll review the financial highlights for the second quarter of fiscal year 2024 and provide a financial outlook for third quarter ending October 31, 2023. I'll be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense and acquisition-related costs adjusted for the impact of taxes. For fiscal Q2, revenue was $62.1 million, in line with the midpoint of our prior guidance range, flat to the prior quarter and down 23% year-over-year. Sequentially, IoT revenue was up slightly, while automotive revenue was down slightly. Non-GAAP gross margin for fiscal Q2 was 64.6% at the high end of our prior guidance range.
Non-GAAP operating expense was $46 million below our prior guidance range of $48 million to $50 million, driven by continued expense management and the timing of spending between quarters. We remain on track to our internal product development milestones. Q2 net interest and other income was $700,000 and our non-GAAP tax provision was $800,000. We reported a non-GAAP net loss of $6 million or $0.15 loss per diluted share, equal to the prior quarter. Now I'll turn to our balance sheet and cash flow. Fiscal Q2 cash and marketable securities decreased $10.9 million to $216.5 million. DSO was relatively flat at 45 days, while inventory declined from 151 to 147 days, down $6.5 million from the prior quarter. Cash used in operations was $6.8 million and capital expenditures for tangible and intangible assets were $5.4 million.
Free cash flow defined as cash from operations less CapEx was minus 20% of revenue for the quarter and positive 4% on a trailing 12 month basis. We had two logistics and ODM companies represent 10% or more of our revenue in Q2. WT Microelectronics, a fulfillment partner in Taiwan that ships to multiple customers in Asia came in at 54% of revenue. Chicony and ODM, who manufactures for multiple IoT customers was 14% of revenue. I'll now discuss the outlook for the third quarter of fiscal year 2024. The near-term revenue outlook is challenging. Customer inventory management actions have accelerated and pockets of end demand softening have appeared. Considering these factors, we estimate that our fiscal Q3 revenue will decline to approximately $50 million plus or minus 4% driven by our IoT end market.
At this time, we anticipate that this revenue range could continue into our fiscal Q4 with sequential revenue growth resuming in our fiscal Q1. We expect fiscal Q3 non-GAAP gross margin to be in the range of 62% to 64%. We expect non-GAAP OpEx in the third quarter to be in the range of $46 million to $49 million with the increase compared to Q2 driven by higher R&D tied to new product development activities. We estimate net interest income to be approximately $1 million. Our non-GAAP tax expense to be approximately $700,000 and our diluted share count to be approximately 40.1 million shares. Ambarella will be participating in Evercore Semiconductor Conference on September 6, the Asia Investor Conference on September 12 hosted by NASDAQ, the Morgan Stanley Bank of America future car series on September 28 and the Mobility Conference hosted by UBS on October 2, please contact us for more details.
Thank you for joining our call today. With that, I will turn the call over to the operator for questions.
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Q&A Session
Operator: Certainly. [Operator Instructions] One moment for our first question. And our first question comes from the line of Christopher Rolland from Susquehanna. Your question, please.
Christopher Rolland: Hey, guys. Thanks for the question. So if you guys could highlight a little bit more pockets of weaker end demand that you're seeing there. And then, maybe you can put this in terms of under-shipment by end market. Last quarter, you talked about as an example, a customer that was under shipping by 30%, has that under shipment changed at that customer, and have new customers joined that kind of level of under shipment as well? Thanks.
Fermi Wang: Right. So first of all, in terms of the pockets of weak end market demand, I think there are two areas, one is on the -- of course, in China, we generally think that the China market is weaker than the other market, but I think more specifically there is our whole IoT business, we do see some weakness and we were expecting some demands for the year-end sales, but we don't see that. So we expect to see -- we are expecting a weaker market in consumer IoT. Those are two areas that cause our allowance. In terms of the, you said that from that particular customer last quarter, we quote about the under shipments. In fact, that customer come back with even further push-out demand and so that our shipment to them will be even lower than the 30% we talked about last quarter.
And I don't think there are people adding to the list, but it's just really a lot of customers already on the list and we see a new wave of push-out and cancellation coming to the end of quarter and come to the -- and all the way go into August, that's where we talk about.
Christopher Rolland: Understood. Perhaps also the revision for next quarter was pretty significant. Can you talk about what kind of backlog coverage you have going into each of these quarters? What kind of visibility you have? What kind of turns you typically need in each of these quarters? And then, just kind of broader picture, I think you guys kind of thought maybe July would be the last of all of this and now looks like the weakness is going to continue through January. I couldn't quite sense it, it didn't -- I don't know was January going to be flat, was it going to be up a little, down a little, any of your thoughts there? And why -- do we have confidence that that is indeed going to be the bottom and will bounce from there? Thank you.
Brian White: Hey, Chris. This is Brian. In terms of backlog coverage coming into any quarter for the company, we typically come in with the quarter in backlog and don't really rely on turns to make the forecast that we provide and that remains the case. So as we give guidance for Q3, Q3 is covered with backlog. And as we look forward into Q4, you asked about kind of whether that's flat or up or down. In the prepared remarks, we talked about an expectation that our range of revenue in fiscal Q4 will likely remain in a similar range as Q3, and again that's based on additional clarity that we've obtained as we've moved through this cyclical correction. Certainly, we're much farther through that correction at this point. We've seen some new information.
We've incorporated that into our current outlooks. We think, it's -- we think we have greater confidence enable to -- in our ability to get our heads around how this is shaping up at this point. We think that there is an opportunity for sequential revenue growth as we move into our fiscal Q1 for '25, but that's what we see at this point in time.
Christopher Rolland: Thanks, Brian. Appreciate it.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Quinn Bolton from Needham and Company. Your question, please.
Quinn Bolton: Hey, guys. Thanks for taking my question. I guess, first, Fermi, you mentioned some of the opportunities for the CV72S in China, where I think you mentioned having secured several Level 2+ ADAS wins that ramp, I think you said towards the end of 2025, but just wondering if you could give us any more color, what's the magnitude potentially of the lifetime revenue of those wins? Are they significant or are they sort of smaller projects? And then, I've got a follow-up. Thank you.
Fermi Wang: Right. So, we -- I talked about the several design wins with Chinese Tier 1 for this Level 2+ application and the application is very specific, which is Smart ADAS plus parking for the Chinese market. And we believe this is going to be the next high volume opportunity in China to replace current single camera ADAS market. I think that -- I think the price is right and feature is right and we also have major OEMs looking at and evaluating the product at this point. So I think -- we think this could be as big as current ADAS market given time. Of course, that we are ramping up the revenue in early -- in the second half of 2025. The value will be just ramping up, but I think on that peak, I think it can be a significant value for the Chinese market point of view.
Quinn Bolton: Great. Thank you, Fermi. And then second question, it sounds like you guys continue to make progress on the data center or enterprise AI inferencing application, I think you mentioned -- you reported the Meta Llama model to the CV3 chip. Wondering, as you look out kind of what are the next steps to -- for that project, where are you on the software and platform development? And are you still sort of thinking of this is probably an 18 month to 24-month time to revenue, is that the right timeframe to be thinking about potentially for revenue from this opportunity?
Fermi Wang: Yes. So, first of all, we start porting Llama to us as soon as it becomes available and I think we've made great progress on that. We are in the plan to demo this Llama in a chatbot demo to our customer sometime in the coming quarter. And also, I think that we continue to believe that we -- our current CV3 represent now only cost-effective and power-efficient but also performance wise is capable to compete with A100. So from that point of view, we continue to develop, but I think you hit one important task is could continue to build out the softer infrastructure to support customer that's definitely another area we are ramping up the resource. We talk about -- we already carve out resource from the current employee pool to support that effort.
But as we move forward, when we start engaging customers and provide customer support, we probably need to increase headcount, but that's a second phase after we start engaging customers with our chatbot demo. In terms of revenue, last quarter we talked about, this is more like a 24-month cycle, I continue to believe as a case.
Quinn Bolton: Perfect. Thank you, Fermi.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please.
Joe Moore: Great. Thank you. Can you talk about how you're thinking about spending your OpEx at this point close to your revenue? I understand revenues were a temporary low point, just how are you thinking about that sort of the balance between the importance of the revenue pipeline versus that sort of near-term cash burn?
Fermi Wang: So, Joe, I think, well -- I think you'll notice that we are definitely trying to control expense, you can see that our Q2 OpEx came below the guidance and that's the direction we're going to continue to look at, where we can cut and where we can save, but however, we still want to continue to invest on our strategic directions, namely CV3 architecture, as well as for the auto and IoT -- our IoT auto, and ARR (ph), but those are the three big pieces of the investment area. But things before we align, we need to look at whether we have a resource to support it. So while we continue to managing carefully by expense, we do not want to sacrifice our strategic directions.
Joe Moore: Great. Thank you. And then in terms of the video processing market that you talked about, we've obviously recognized that there was going to be a replacement cycle from video processing to computer vision, but do you think you're losing share in this segment, this sort of legacy markets that aren't moving to CV, is that part of why the numbers are challenged here.
Fermi Wang: I think what I said in the consumer IP can, majority of the product today is really focused on low end and cost competitive solutions and that's where we don't spend a lot of money to invest. As you know, our investment strategy is always focused on the areas where we can continue to demand higher AI performance. And for the consumer IoT side that we have a focus on low-end SoC roadmap definitely hurt us. I think that's where we have the biggest risk in terms of losing market share.
Joe Moore: Great. Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Matt Ramsay from TD Cowen. Your question, please.
Matt Ramsay: Thank you. Good afternoon, guys. Forgive me for this question, Fermi, but -- maybe I read a little bit too much into sort of the tone of your earnings release and some of your commentary, and with all that -- I mean, Joe asked the question just now about your investments and how you're going to focus on and what I'm trying to get at is maybe one step -- maybe one level abstraction above that is like the focus of the company like changed a lot now. I mean it seems like there's maybe a de-emphasis of your camera business and now a shift toward investments in hardware and probably more software to support inference inclusive of some data center application. So I guess should we be taking some of the tone here over the last tonight and maybe last quarter's call, as well as a big shift in direction of where you and your team are focused.
And I guess the second part of the question is, has there been a change at all in the focus of the company on the automotive end market? Changes in expectation of revenue, timing of revenue, investment, et cetera., like I said, maybe you can, if I'm reading things that aren't there certainly tell me, but I think it's an important question to address.
Fermi Wang: Right. First of all, I think we continue to committed to the IoT market. I think that this is, when you say camera, I think you meant IoT market. I think that's one area we need to continue to focus and continue to provide solution. After we think that we have a differentiated technology, as well as a big customer base, we need to continue and we will continue to provide solutions to our customers. So I think that is one area I will never say we take our eyes off the ball. And given that, I think we want to continue to invest on auto, but when you see change in auto strategy, one thing that I would say, what's happening in the last six months is, we believe that the China market will give us earlier and shorter-term revenue and then the other market.
We definitely more focus our resources to the Chinese market for the CV72 and CV3, and I think that's an area we believe is -- can give us faster to the revenue, but that doesn't mean we don't focus on our USA, Europe, or other markets that we can get our CV3 design, but obviously, those design will take longer time to go to revenue. So I think it's really a focus on the short-term revenue versus our longer-term opportunities. But I will say for LLM (ph), one thing is it's become very clear even our current market like even security camera, when we talk to our professional security camera customers, they all start thinking about how and what impact their business, how to use LLM (ph) to integrate multiple cameras into the services for the service they provide to their customers.
And also that automotive guys also start thinking bigger, bigger transformer model, which kept the performance getting higher and leverage, while we investment in AI model. So I rethink that although that LLM (ph) start with, on the server side, which is definitely an interesting area for us, but just in the last three months, when we started talking to our existing customers, it became very clear that LLM (ph) is also on the roadmap for all our existing customer. So LLM (Ph) became a roadmap for us is not just an opportunity we can choose to invest on that. I hope this clarifies your question.
Matt Ramsay: No. Thank you, Fermi, for all the color there. I appreciate it. I guess as my follow-up question you mentioned there's going to be different phases of your new investment around inference and LLM, have you guys thought about sizing some of those investment areas, I mean, how -- what number of people or number of dollars that you're shifting internal resources? And then, if it goes well, like, what kind of the magnitude of investment are you guys considering given where the P&L is right now? Thanks.
Fermi Wang: Right now, so for the current phase, we talk about we only carve-out a team that we using our current resources, which is under our payroll already to do that, but obviously, when we start ramping up, we probably need to duplicate a similar size of team to support the LLM. So we're talking about anywhere from 60 to 80 people total to support or limit engagement for the customer like our goal is not going to hold the possible customer that we said last time, we need to prove the concept, and with several customers that really want to have a second source for LLM on the server side. Also several customer in our current customer base that can use LLM for their roadmap, So I think with the size and limit to the scope and we think that we can fund this activity with our P&Ls.
Matt Ramsay: Got it. I'll jump back in the queue. Thank you very much.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.
Ross Seymore: Hi, guys, Thanks for taking the question. I want to ask a near-term question and then I'll have a follow-up. On the near-term side, I guess there's kind of two parts, so forgive me for that, but for the guide for the third quarter, Fermi or Brian, you mentioned that I think you said the majority of the weakness should be in the IoT side not auto, I just wanted to get some color on that. And then the second part of the first question here is going to be the fiscal year basis, I think Joe kind of asked it earlier, but it looks to me like your non-CV revenues are going to be down about 50% year-over-year, how much of that, if you can guess, do you think is share that's just gone and it's the low-end stuff you mentioned, first is, just a cyclical dynamic of inventory burn and some of that will snap back.
Fermi Wang: Right. So, first of all, I think that for the short-term side, we definitely believe that, it’s -- I think the question is related to…
Brian White: I think the first part of your question, Ross, was confirmation that the weakness that we see in revenue for fiscal Q3 is driven by the IoT side of the equation and that is correct. We're seeing obviously some significant rebalancing of inventory and orders across our businesses. But in terms of what's driving this leg down in revenue between Q2 and Q3, it appears to essentially be all IoT at this point.
Fermi Wang: Right. On the second part is really whether that video processor side, I think that the video processor side is definitely part of the weakness we talk about in the consumer IP cam side, and so that really depends on the inventory situation, whether they, well -- how fast they can rebound to it, but I don't think we can snap back to the original level. We believe that some of our video processor business will be replaced by our low-end CV chip too. So I think that we talk about next year, our video processor business will continue to go down, but not in the same scale that we sold this year.
Ross Seymore: And then I guess my follow-up, and forgive me, I guess it's kind of three here kind. If we look at the growth for fiscal year '25, you said the video processors will still go down. What do you think are the key growth drivers in your CV business that we should look forward to either when design wins kick in, and inventories burn, so cyclically or secularly just roughly speaking, what do you see as the biggest tailwind to offset that video processor headwind.
Fermi Wang: So for the for CV side, I definitely believe that both when the inventory burns through as well as our new projects like CV5 and CV72 production will help us to get tailwinds to boost our IoT business. But even on auto side, we believe that new design wins can help us to get more revenue growth for next year. So I think that professional -- from the professional IP Cam side, it's become very clear that we think that our market is still -- we hold our market share very well and as soon as we get the inventory cleaned, we should be able to see a rebound on the current design wins and plus with the CV5 and CV72 design when we talk about that should help.
Ross Seymore: Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Tristan Gerra from Baird. Your question, please.
Unidentified Participant: Hi. This is Thera (ph) for Tristan Thanks for taking the questions. Just, you touched on the IoT side of the business, but maybe on the auto side, have you seen any step downs in order patterns from automotive OEMs as they take inventory control measures in the past few months, and do you expect any further order reductions before year-end in auto?
Fermi Wang: Right. So we did some small customer that trying to -- that reducing their inventory, but it's not as bad as IoT side. I think most of the time, I think our automotive customers continue to take the parts of the plant. Although we see some weakness but it's not like I said, IoT is really the main problem we're dealing with right now.
Unidentified Participant: Okay. Great. And then for my follow-up, how different are the potential engagements for CV3 given the long-term nature and software platform cost of developing ADAS solutions versus the traditional segments that you play, including delivery orders?
Fermi Wang: Right. So obviously, the CV3 design win take much longer than our recorder in the past. Recall that in the past, it was like 18 months, even in auto, 18 months design cycles. Here in the outside channel, we're talking about four years. That's the reason we decided to really focus on our CV72 and CV3 opportunity in China first and so that we can address the revenue time to market -- time to revenue was the issue. So for that, we talk about CV72, most likely will have a revenue second half 2025 calendar year. And I even think the CV3, we have a design win with a Tier 1 that we might generate revenue in fiscal -- sorry, calendar year 2026 and that is definitely shorter than any other areas that we're seeing.
Unidentified Participant: Okay. Great. Thanks for the questions.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Tore Svanberg from Stifel. Your question, please.
Tore Svanberg: Yes. Thank you. Fermi just back to sort of the resources and the opportunities and specifically thinking about the CV3, the leverage of the software because, we're talking about auto, right, which is an edge device, but we're also talking about AI accelerators at the core, so just trying to understand how much portability you have with your current investments so that you don't have to go through a completely new investment cycle if you will?
Fermi Wang: Right. So, we don't plan to have a brand new investment cycle. With our current resources, we already build up our software stack in a way, we are ready to demo a brand new software stack that's 100% AI-based very soon. That's what we talk about in the past, right? We talk about that we are working with Conti software stack, but in parallel, we're doing our own software development. With our current resource, with the two acquisitions, both Oculii as well as Parma VisLab. We are at a stage ready to demo our next generation of software stack. So from the development point of view, software side, I think we definitely not only prove that we have enough resources but we finished the work to some extent. So now the issue is with LLM, also we funded our phase -- first phase of LLM investment based on our current resource, and leveraging a lot of investment we're putting into CV3 software already.
But for the second phase, we are waiting to see the result of first phase of our engagement with customers, even that ramping up is not going to be a lot more than what we have today. We definitely will be ready to talk to investors when we are talking about ramping up. From that point of view, you can think that even for the silicon side for LLM, like I said, this is going to be our next phase of CV3 roadmap. So we have to build a next-generation roadmap for the silicon side, and this will leverage 100% existing VLSI team (ph). So any new development or new investment cycle for LLM is a software team to support customer. I hope that for clarifies the question.
Tore Svanberg: Yeah. Absolutely. And I also wanted to follow up on, I think it was a previous question about LLM or AI accelerator milestones, so what kind of milestones as investors should we be looking at here? I obviously understand the timing part of it, but what are some of the more specific milestones that we should be keeping an eye on?
Fermi Wang: I think the first important milestone is that we demo -- our chatbot demos to our customers and it will happen sometime in the coming quarter. So I think that's important because with the demo it also shows the performance of how we compete -- compare to our competitors and all those information will become open to our customers. I think that's probably the biggest near-term milestone.
Tore Svanberg: Very helpful. Thank you, Fermi.
Fermi Wang: Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Kevin Cassidy from Rosenblatt. Your question, please.
Kevin Cassidy: Yeah. Thanks for taking my question. My question is also along the lines of the software stack, with the CV72 in China, how much of the software stack you developed, is there a component of that and can you sell that software stack too?
Fermi Wang: Yeah. So there are two, I think our strategy -- software strategy inside China and outside are different. Inside China, we're counting on our software partners because to really collect data and trend the data in China is problematic for us. So we are counting on working with our Chinese software partners to deal with CV72. Last quarter, we talked about -- we already identified multiple, our software partners and they are porting aggressively their software to our CV72 platform and ready to demo to OEMs in this quarter. So I think from the China side is pretty -- we know exactly what to do with CV72. With outside China, with CV3, we talked about our collaboration with Conti, but more importantly, we want to demo our own software stack, which we don't plan to bundle 100%, but we definitely think this is important software, important technology that we can help our customer to leverage while we have developed.
This software stack will top more next time, but however is really we think one of the very few software stack is 100% AI based, and we can show the performance and the functions that were close to B and C level, and I think this is definitely one thing we need to talk about not only technology but also our business -- our business model, we are ready sometime in the near future.
Brian White: Yeah, Kevin. I'll just add next week September 5 to 8 Continental will be demonstrating our joint software stack on CV3 at the IAA shown, so public demonstration if anyone's in there to check it out.
Kevin Cassidy: [Technical Difficulty] We'll look for that. And maybe along those lines of demos and your work with Conti, is there any update on how many OEMs you're talking to and any progress at all?
Fermi Wang: We announced -- yeah, we announced one design win last time and at this time, we will continue to engage multiple OEMs with potential collaboration with Conti, but also independent that we also told you OEM directly. So we continue to have engagement -- multiple engagements with OEMs at this point.
Kevin Cassidy: Okay. Thank you.
Operator: Thank you. One moment for our next question and our next question comes from the line of Suji Desilva from ROTH. Your question, please.
Suji Desilva: Hi, Fermi. Hi, Brian. So thanks for giving us the mix of revenue for the year, roughly between the products, Video, CV2, CV3. Can you give us a sense of what the mix is currently or kind of when it normalizes between auto and IoT, because it sounds like those two categories having different trends right now and I think it'd be helpful to understand kind of where each of the revenue today and maybe in a year or so when things normalize.
Brian White: Yeah. Sure, Suji. So if you go back to last year, automotive was about a quarter and IoT was about three quarters, given the relative stability of automotive this year versus IoT which is much more volatile to the downside that mix is looking more like 70% IoT and 30% automotive for the current year. Obviously, we said that the size of our SAM (ph) that pursuing over a multiyear time period is much more lever to automotive where we'd be the inverse of that relationship or long term we would expect automotive to be up 70% and IoT about 30% as we move out several years in the future as we get traction with CV3 and some of the other automotive.
Suji Desilva: Okay. Thanks, Brian. That's very helpful. And then just trying to reconcile guys, the large pipeline number you've been giving for the last several quarters versus the inventory correction here, is there a timeframe in which some of that pipeline starts to convert meaningfully contribute, I imagine that that process will be independent of the inventory abbreviations (ph) that are happening right now, just correct me if that's wrong, but I heard that's not pushed out or pulled in any way because of what's going on right now. Thanks.
Fermi Wang: So I think that talking about the funnel we talked about, so for the very near term, for example, if you talk about funnel for this year, definitely there is some impact from the inventory, but in general, I don't think there's the current inventory correction should have an impact to the funnel because it's really based on design wins and also that probability ended the value of the design win. So we'll be ready to talk about this number in November this year.
Suji Desilva: And Fermi, just give us an idea of what years does start to kind of come in the elbow of those, like how many years away that is?
Brian White: Well, our funnel, Suji, at six years, and given the time it takes to land some of these wins, in particular with CV3 it was back end loaded and definitely in the latter half of those six years.
Suji Desilva: Okay. Great. Thanks a lot.
Operator: Thank you, One moment for our next question. And our next question comes from the line of Gary Mobley from Wells Fargo. Your question, please.
Gary Mobley: Hey, guys. Thanks for taking my question. If I'm not mistaken, there's about 20 customers that really move the needle for your overall business, have you had an opportunity to review those top 20 customers and where they stand with respect to inventory balances, whether healthier or not and to give us a sense [indiscernible] of the 20% sequential revenue decline expected for the third quarter. How many customers you are driving that down or is it isolate in just one or two?
Fermi Wang: I think that in general for IoT all of the top 20 customers are having inventory correction problems, but auto might not be as bad. Some of the auto customers have inventory problems, but our top auto guys -- some of them may not. So if you look at -- if you really separate application looking at IoT, any customer -- any top -- any of our top customers, all of them have inventory problems, maybe at a different degree, yeah.
Gary Mobley: I'm sorry, go ahead, Fermi.
Fermi Wang: I was just saying that maybe they will have different degrees of inventory, but all of them have some significant inventories.
Gary Mobley: Okay. Thank you. So a follow-up, I wanted to ask about your relationships with Bosch and some other China Tier 1 partners for CV3, where do those stand relative to how Continental is moving along?
Fermi Wang: So I think in China, we focused on working with Chinese Tier ones as the first priority, and also with Conti and Bosch. So I think that those are the priorities that we have. And we definitely have continue to have appeal Sung RFQ OEMs through those Tier 1, CV72 because this is really the silica is not ASO policies is SoC solution. This is definitely Chinese Tier 1 play for Porsche and Conti will focus on the CV3 levels a solution to Chinese market right now. And we definitely have a multiple discussion with Bosch and Conti on this.
Gary Mobley: Thanks, Fermi. Thanks.
Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dr. Fermi Wang for any further remarks.
Fermi Wang: Thank you everybody for joining us today and looking forward to talk to you soon. Thank you.
Operator: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
