Q2 2024 Ambarella Inc Earnings Call
Participants
Brian C. White; CFO; Ambarella, Inc.
Feng-Ming Wang; Co-Founder, President, CEO & Executive Chairman; Ambarella, Inc.
Louis P. Gerhardy; VP of Corporate Development; Ambarella, Inc.
Christopher Adam Jackson Rolland; Senior Analyst; Susquehanna Financial Group, LLLP, Research Division
Gary Wade Mobley; Senior Analyst; Wells Fargo Securities, LLC, Research Division
Joseph Lawrence Moore; Executive Director; Morgan Stanley, Research Division
Kevin Edward Cassidy; Senior Semiconductor Research Analyst; Rosenblatt Securities Inc., Research Division
Matthew D. Ramsay; MD & Senior Research Analyst; TD Cowen, Research Division
Nathaniel Quinn Bolton; Senior Analyst; Needham & Company, LLC, Research Division
Ross Clark Seymore; MD; Deutsche Bank AG, Research Division
Suji Desilva; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division
Tore Egil Svanberg; MD; Stifel, Nicolaus & Company, Incorporated, Research Division
Unidentified Analyst
Presentation
Operator
Thank you for standing by, and welcome to Ambarella's Second Quarter Fiscal Year 2024 Earnings Conference Call. (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 P. 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. 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.
Feng-Ming 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 richer mix of AI SoCs, highlighting the value of our emerging AI inference 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 endpoint for IoT and automotive applications. And we are now expanding our AI inference process 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 3 major SoC product families, video processors, CV2 and the CV3. First, video processes for human viewing are expected to be about 40% of total revenue this year, down from 55% last year, and they typically command a single-digit ASP. For several years, we have 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 established Ambarella in the AI inference market, and these SoCs are expected to approach 60% of our total revenue in fiscal 2024, up from 45% last year, this family of AI inference SoC commands an ASP close to $20 and serves computer vision applications for auto and IoT. CV2 remains an important growth market for Ambarella in the mid to long term.
Third, our CV3 family SoC first began to sample a year ago. Based on our third-generation AI inference technology, this SoC target more challenging AI inference workloads 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 embedded in 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-AD-High, and we expect to have chatbot demos available later this year. We will provide updates on our continuing evaluation and are encouraged 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 customers worldwide. Motorola introduced its H5A multisensor camera based on our CV2 AI SoC. The camera offers up to 360-degree view utilizing to full image sensors with up to 32 megapixel resolution and AI analytics.
Axis, a unit of Canon, announced the 2-megapixel M4215 cameras and the 4K M4218 cameras both based on our CV25 AI inference SoCs, targeting indoor surveillance applications. Japanese market leader, iPro announced the expansion of its Rapid PTZ X-Series and S-Series with 16 new models based on our CV25 and CV22 AI inference processors.
Dynacolor introduced its model Q next generation multidirectional camera using our CV5 AI processor to support four 5 megapixel sensors. And in South Korea, Hanwha launched 3 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 intruders. I will now talk about representative customer activity in the automotive market.
In our May 30 earnings call, I mentioned the positive feedback we received at the Shanghai Auto Show for our CV72AQ AI inference processor, a derivative of the CV3 family of SoCs. During Q2, I visited Tier 1 in China, and I'm pleased to report multiple Tier 1 wins for Level 2+ applications.
We expect some of these Tier 1 projects to commence production in the second half of the calendar year 2025. We are pleased to announce our first CV5 win in the passenger vehicle, we expect this win to enter production in the next 12 months. In this application, the CV5 will support AI inference processing for multiple cameras.
Additionally, in July, GAC Motor in China unveiled its Hyper GT intelligence coupe, including an L2+ ADAS intelligent driver assistance systems based on our CV22AQ. And recently, the Chinese government passed a new policy allowing camera monitoring systems CMS to replace conventional left and right side mirrors.
The policy also covers interior rearview mirrors, with the CMS enabled models being legal beginning in July 2023. This CMS system represents a significant opportunity for Ambarella's CV2 family of AI inference processors. During the quarter, BAIC, one of the largest automotive OEMs in China began selling SUVs equipped with a 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 start-ups 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 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 Go3 camera, a lightweight but powerful 2K camera that utilizes our H22 video processor. This representative engagement indicate a healthy pace of continuing customer design activity for our AI inference processors.
Our investment strategy is aligned with the anticipated market demand for more sophisticated software-intensive AI inference applications. In the last 3 years, thanks to the CV2 family, we have demonstrated the ability to capture more value per win as customer demand migrate to AI from video processors. Looking forward, we believe our new products such as CV5, CV72 and CV3 are well positioned to support the increasingly sophisticated AI inference workload our customers are anticipating.
As these new products 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 investment to fully realize the AI inference market opportunities we have discussed today. With that, Brian will now discuss the Q2 results and the outlook in more detail.
Brian C. White
Thanks, Fermi. I'll review the financial highlights for the second quarter of fiscal year 2024 and provide a financial outlook for our 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 2 logistics and ODM companies represent 10% or more of our revenue in Q2. WT Microelectronics, a fulfillment partner in Taiwan, that ships to multiple customers in Asia, came in at 54% of revenue. Chicony an ODM 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's 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. And with that, I'll turn the call over to the operator for questions.
Question and Answer Session
Operator
(Operator Instructions) And our first question comes from the line of Christopher Rolland from Susquehanna.
Christopher Adam Jackson Rolland
Guys, thanks for the question. So if you guys could highlight a little bit more the pockets of weaker end demand that you're seeing there. And then maybe you can put this in terms of undershipment by end market. Last quarter, you talked about as an example, a customer that was under shipping by 30%. Has that undershipment changed at that customer and have new customers joined that kind of level of undershipment as well.
Feng-Ming Wang
Right. So first of all, in terms of the pockets of weak end market demand. I think there are 2 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 home 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 2 areas that cause a loss. In terms of the -- you said that from the particular customer last quarter, we quoted about undershipments. 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 talk about last quarter. And I don't think there's people adding to the list, but it's just really a lot of customers already on the list, but we see a new wave of push out cancellation coming to the end quarter and come to -- and all the way going to August. That's where we talk about.
Christopher Adam Jackson 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. It now looks like the weakness is going to continue through January. I couldn't quite sense it, it didn't sound -- 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 we'll bounce from there?
Brian C. White
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 in able 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.
Operator
And our next question comes from the line of Quinn Bolton from Needham & Company.
Nathaniel Quinn Bolton
I guess first, on some of the opportunities for the CV72S in China, where I think you mentioned having secured several Level 2+ plus 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.
Feng-Ming Wang
Right. So I talked about several design wins with the 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 a next high-volume opportunity in China to replace the 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 evaluating the products at this point. So I think -- we think this could be as big as current ADAS market at the given time. Of course, we're ramping up the revenue in early -- in the second half 2025, the volume will be just ramping up, but I think when at peak, I think it can be a significant volume from the Chinese market point of view.
Nathaniel Quinn Bolton
Great. And then second question, it sounds like you guys continue to make progress on the data center or enterprise AI inferencing application, I think 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 as probably an 18- to 24-month time to revenue. Is that the right time frame to be thinking about potentially for revenue from this opportunity?
Feng-Ming Wang
Yes. So first of all, we start putting LLaMA 2 as soon as it becomes available. And I think we made great progress on that. We are in a plan to demo this LLaMA 2 in chatbot demo to our customer sometime in the coming quarter.
And also, I think that we continue to believe that we -- our current CV3 represents not only cost effect 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 see the one important task is continue to build out the software infrastructure to support customers.
That's definitely another area we are ramping up resource. We talk about really carve out a resource from the current employee pool to support the effort. But when we move forward, when we start engaging customer providing customer support, we probably need to increase headcount. But that's the second phase after we start engaging customers with our chatbot demo. In terms of the revenue, last quarter, we talked about -- this is more like a 24-month cycle. I continue to believe that's the case.
Operator
And our next question comes from the line of Joe Moore from Morgan Stanley.
Joseph Lawrence Moore
Great. Can you talk about how you're thinking about spending your OpEx at this point, close to your revenue, I understand revenues are at a temporary low point. Just how are you thinking about that sort of the balance between the importance of the revenue pipeline versus the sort of near-term cash burn?
Feng-Ming Wang
So Joe, I think while -- I think you noticed that we are definitely trying to control our expense. You can see that our Q2 OpEx come below the guidance. And that's the direction we're going to continue to look at where we can cut, where we can save. But however, we still want to continue to invest on our strategic directions. Namely Series 3 architecture as well as for the auto and IoT, auto and AI. But those are the 3 big pieces of the investment area, things for below the line, we need to look at whether we have a resource to support it. So while we continue to manage carefully about expense, we do not want to sacrifice our strategic direction.
Joseph Lawrence Moore
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 the segments, the sort of legacy markets that aren't moving to CV? Is that part of why the numbers are challenged here?
Feng-Ming Wang
I think back what I said in the consumer IP can, majority of the product today is really focused on the low-end cost-competitive solutions. And that's where we really don't spend a lot of money to invest on. 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 haven't focused on a lower-end SoC road map definitely hurt us. I think that's where we have the biggest risk in terms of losing market share.
Operator
And our next question comes from the line of Matt Ramsay from TD Cowen.
Matthew D. Ramsay
Forgive me for this question from me, 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 the -- I mean, Joe asked the question just now about your investments and how you're going to focus them. And what I'm trying to get at is maybe one step maybe one level of traction above that is like the focus of the company like changed a lot now?
I mean it seems like there's a maybe deemphasis of your camera business and now a shift toward investments in hardware and probably more software to support inference inclusive of some data center applications. 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.
Feng-Ming Wang
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 -- we will continue to provide the 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 in auto. But when you say changing auto strategy, one thing that I would say what happened in the last 6 months is we believe that the China market will give us earlier and shorter-term revenue than the other market, we definitely moved more focus, our resource to Chinese market for the CV72 and CV3. And I think that's an area we believe is -- can get us faster to the revenue.
And -- but that doesn't mean we don't focus on our U.S. and Europe or other markets, we can get our CV3 design but obviously, those design will take a longer time to go to revenue. So I think it's really a focus on the short-term revenue versus longer-term opportunities. But I would say for LLM, 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 LLM and what impact their business, how to use LLM as 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 is the performance getting higher and leverage while we invest in our LLM model.
So I really think that although that LLM start with -- on the server side, which is definitely an interesting area for us. But it's just in the next 3 months when people talk -- when we start talking to our existing customer, it became very clear that LLM is also on the road map for all our existing customers. So LLM a road map for us is not just an opportunity we can choose to invest or not. I hope this is clarifying your question.
Matthew D. 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 inferences 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 magnitude of investment are you guys considering given where the P&L is right now?
Feng-Ming Wang
Right now. So for the current phase, we talk about we only carve out a team that we're using our current resource, which is under our payroll already to do that. But obviously, when we start ramping up we probably need to duplicate a similar sized team to support LLM. So we are talking about anywhere from 60, 80 people total to support a limited engagement for the customer like our goal is not going to all the possible customers 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 customers in our current customer base that can use LLM for their road map. So I think with the -- to limit the scope and we think that we can fund this activity with our P&L's.
Operator
And our next question comes from the line of Ross Seymore from Deutsche Bank.
Ross Clark Seymore
I want to ask a near-term question and then I have a follow-up. On the near-term side, I guess there's kind of 2 parts. So forgive me for that. But the guide for the third quarter for me or Brian, you mentioned that I think you said the majority of the weakness would 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 versus just the cyclical dynamic of inventory burn and some of that will snap back.
Feng-Ming 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 C. White
Yes. I think your -- the first part of your question, Ross, was a 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.
Feng-Ming Wang
Right. On the second part is really whether that the video processor side, I think that the video processor side is definitely part of the weakness we talked about in the consumer IoT side. And so that it 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 scales that we saw this year.
Ross Clark Seymore
And then I guess as my follow-up, and forgive me, I guess, we are kind of 3 here. If we look at the growth for fiscal year '25, you said that the video process 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 inventory is burned, so cyclically or secularly just roughly speaking, what do you see as the biggest tailwind to offset that video processer headwind.
Feng-Ming Wang
So for the -- for CV side, I definitely believe that both inventory burn through as well as our new project like CV5 and CV72 production, will help us to get tailwinds to boost our IoT business. But even on auto side, we believe that there's new design wins can help us to get more revenue growth for next year. So I think that professional -- from the professional IP 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 win we talk about, that should help.
Operator
And our next question comes from the line of Tristan Gerra from Robert W. Baird.
Unidentified Analyst
This is Todd for Tristan. 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?
Feng-Ming Wang
Right. So we did, some small customer that trying -- reducing their inventory, but it's not as bad as the IoT side. I think most of the time, I think our automotive customers continue to take the part of the plan. Although we see some weakness, but it's not like I said, IoT is really the main problem we are dealing with right now.
Unidentified Analyst
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 in, including data recorder.
Feng-Ming Wang
Right. So obviously, the CV3 design win take much longer than our recorder in the past. Recorder in the past was like 18 months even its auto grade 18-month design cycles. Here in outside China, we talk about 4 years. That's the reason we decided to really focus on our CV72 and CV3 opportunity for -- in China first and so that we can address the revenue -- time to market, time to revenue issue. So for that, we talk about CV72, most likely will have a revenue second half 2025 calendar year. And I even think 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.
Operator
And our next question comes from the line of Tore Svanberg from Stifel.
Tore Egil Svanberg
Fermi, just back to sort of the resources and the opportunities and specifically thinking about CV3, the leverage of the software because we're talking about auto, right, but -- 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.
Feng-Ming Wang
Right. So we don't plan to have a brand-new investment cycle. With our current resource, we only 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. Like what we talked about in the past, right? We talk about -- we are working with the -- currently on software stack, in parallel we're doing our own software development. With our current resource with the 2 acquisitions, both Oculii as well as VisLab we are at a stage ready to demo our next-generation software stack.
So from a development point of view, software side, we are -- I think we definitely not only proved that we have enough resource, but we'll finish the work to certain extent. So now the issue is with LLM. Also, we founded our first phase of LLM investment based on our current resource and leveraging a lot of investment we put into CV3 software already.
But for the second phase that we are waiting to see whether the result of first phase of engaging with customers, that -- even that ramping up is not going to be a lot more than what we have today. We definitely -- we'll 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 road map. So we have to build the next generation road map for the silicon side, and this will leverage 100% of existing VLSI team. So any new development or new investment cycle for LLM is a software team to support customers. I hope that clarifies the question.
Tore Egil Svanberg
Yes. No, 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 always understand the timing part of it, but what are some of the more specific milestones that we should be keeping an eye on?
Feng-Ming 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 our -- how we compete compared to our competitors. And all those information will be become -- open to our customers. I think that's probably the biggest near-term milestone.
Operator
And our next question comes from the line of Kevin Cassidy from Rosenblatt.
Kevin Edward Cassidy
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? Can you sell that software stack too.
Feng-Ming Wang
Yes. So there are 2 -- I think our strategy -- software strategy inside China, outside China are different. Inside China, we are counting on our software partners because to really collect data and train the data in China is problematic for us. So we are counting on working with our Chinese software partners to deliver CV72.
Last quarter, we talked about -- we already identified multiple, our software partner, and they are porting aggressively their software to our CV72 platform, hardware platform and ready to demo to OEMs in this quarter. So I think from the China side, it's 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 an important software, important technology that we can help our customer to leverage how we have developed. This software stack, we will talk about more next time. But however, it's really, we think, one of the very few software stack is 100% AI-based and we can show the performance and the functions are close to the BAIC level. And I think this is definitely one thing we need to talk about not only technology, but also our business model where we are already, sometime in the near future.
Brian C. White
Yes. Kevin, I'll just add next week, September 5 to 8 Continental will be demonstrating our joint software stack on CV3 at the IAA show. So public demonstration, if anyone's in the area to check it out.
Kevin Edward Cassidy
We'll look for that. Maybe along those lines of demos, and your work with Conti, is there any update of how many OEMs you're talking to and any progress at all you can...
Feng-Ming Wang
Yes, we announced one design win last time. And this time, we have continued to engage multiple OEMs with potential collaboration with Conti, but also independent that we also talk to OEMs directly. So we still continue to have engagement, multiple engagement with the OEMs at this point.
Operator
And our next question comes from the line of Suji Desilva from ROTH.
Suji Desilva
As 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 either currently or kind of when it normalizes the auto and IoT because it sounds like those 2 categories are having different trends right now, and I think it would be helpful to understand kind of where you sit on your revenue today and then maybe in a year or so when things normalize?
Brian C. White
Yes. Sure, Suji. So if you go back to last year, automotive was about 1/4 and IOT is about 3/4. Given the relative stability of automotive this year versus IoT, which has been 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 we are pursuing over a multiyear time period is much more levered to automotive, where it would 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 solutions.
Suji Desilva
Okay. That's very helpful. And then just trying to reconcile, guys, the large pipeline number you've been giving the last several quarters versus the inventory correction here. Is there a time frame in which some of that pipeline starts to convert and meaningfully contribute. I imagine that, that process will be independent of the inventory perturbations that are happening right now, just correct me if that's wrong, but that's not pushed out or pulled in any way because of what's going on right now.
Feng-Ming Wang
So I think that you're talking about the final number we talked about. So for the very near term, for example, if you talk about the partner for this year, definitely, there is some impact for the inventory. But in general, I don't think that's the current inventory correction should have any impact to the funnel because it's really based on design wins and also the probability and the volume of the design win. So we'll be ready to talk about this number in November this year.
Suji Desilva
And can you just give us some idea of what years those start to kind of come in, the elbow of those? Like how many years away that is?
Brian C. White
Well, our funnel, Suji, is 6 years. And given the time it takes to land some of these wins and particularly with CV3, it was back-end loaded in the -- definitely in the latter half of those 6 years.
Operator
And our next question comes from the line of Gary Mobley from Wells Fargo.
Gary Wade Mobley
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 healthy or not. And to give us a sense of the either of the 20% sequential revenue decline expected for the third quarter, how many customers are driving that down? Or is it in just one or two.
Feng-Ming Wang
I think that, in general, for IoT, all of the top 20 customers are having inventory correction problems. But total might not be as bad. Some of the auto customers have an inventory problem, but our top auto guys, some of them may not. So if you look at -- if you really separate the application, looking at IoT, any customer or any of our top customers, all of them have inventory problems, maybe to a different degree, yes. I'm just saying that maybe they will have different degrees of inventory, but all of them have some significant inventories.
Gary Wade Mobley
Okay. 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?
Feng-Ming Wang
So I think in China, we focus on working with the Chinese Tier 1 as the first priority and also with Conti and Bosch. So I think that -- those are the priorities we have. And we definitely have continued to have appeal some RFQ from OEMs through those Tier 1s. CV72, because this is really -- the silica is not ASIL, but it's a systems ASIL solution.
This is definitely a Chinese Tier 1 play. For Bosch and Conti were focused on the CV3 levels of our solution to Chinese market right now. And we definitely have that multiple discussion with our Bosch and Conti on this.
Operator
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.
Feng-Ming 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.
