Ambarella - Q2 2024
August 29, 2023
Transcript
Operator (participant)
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 listen only mode. After the speaker's presentation, there will be a question-and-answer session. We ask that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows. To remove yourself from the queue, simply press star one one again. 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 (VP of Corporate Development)
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 Chief Executive Officer, and Brian White, Chief Financial Officer. 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 risk, 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 file 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 websites, 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 (CEO)
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 about $12, and it 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 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 endpoint for IoT and automotive applications. 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 the CV3.
First, video processors for human viewing are expected 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 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 comes in 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 of 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 the 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-AD-High. We expect to have chatbot demos available later this year. We will provide updates on our continuing evaluation.
I'm 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 major customers worldwide. Motorola introduced its H5A multi-sensor camera based on our CV2 AI SoC. The camera offers up to 360-degree view, utilizing two to four 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, i-PRO, announced the expansion of its Rapid PTZ X-Series and the S Series, with 16 new models based on our CV25 and CV22 AI inference processors.
Dynacolor introduces Model Q, next-generation multi-directional camera using our CV5 AI processor to support four 5 megapixel sensors. 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 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 this Tier 1 project to commence production in the second half of the calendar year 2025.
We are pleased to announce our first CV5 win in a 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 intelligent coupe, including an L2+ ADAS intelligent driver assistance system based on our CV22AQ. Recently, the Chinese government passed a new policy allowing camera monitoring system, CMS, to replace conventional left and the right side mirrors. The policy also covers interior rear view mirrors, with the CMS-enabled models being legal beginning in July 2023. This CMS system represent a significant opportunity for Ambarella, the 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 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 the reaching 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 utilize our H22 video processor. This representative engagement indicate a healthy pace of continuing customer design activity for AI inference processors. Our investment strategy is aligned with the anticipated market demand for more sophisticated, software-intensive AI inference applications.
In the last three 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 newer products, such as the CV5, CV72, and the CV3, are well positioned to support the increasingly sophisticated AI inference workloads our customer are anticipating. As 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 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 White (CFO)
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-$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 -20% of revenue for the quarter and positive 4% on a trailing twelve-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, ±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%-64%. We expect non-GAAP OpEx in the third quarter to be in the range of $46 million-$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 2nd. Please contact us for more details. Thank you for joining our call today. With that, I'll turn the call over to the operator for questions.
Operator (participant)
Certainly. And as a reminder, ladies and gentlemen, please limit yourselves to one question and one follow-up. One moment for our first question. And our first question comes from the line of Christopher Rolland from Susquehanna. Your question, please.
Christopher Rolland (Senior Equity Analyst)
Hey, 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 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 (CEO)
Right. So, first of all, in terms of the pockets of weak end market demand, I think there are two areas. One is, 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, you know, demands for the year-end sales, but we don't see that. So we expect to see—we are expecting a weaker market in the consumer IoT. Those are two areas that comes to our minds. In terms of the, you said that, from the particular customer last quarter, we quote on the 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's people adding to the list, but it's just really a lot of customer already on the list, but they come, we see a new wave of push out, the cancellation coming to the end of quarter and come to the and all the way going to August. That's where we talk about.
Christopher Rolland (Senior Equity Analyst)
Understood. Perhaps also, you know, the revision for next quarter was, 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? You know, 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, you know, why, you know, do we have confidence that that is indeed going to be the bottom and we'll bounce from there? Thank you.
Brian White (CFO)
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 forecasts that we provide, and that remains the case. So, you know, 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, you know, we've obtained as we've moved through this, you know, cyclical correction. You know, 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 and able to, in our ability to, you know, get our heads around how this is shaping up at this point. We think that there's an opportunity for sequential revenue growth as we move into, our fiscal, Q1 for 2025. But that's, that's what we see at this point in time.
Christopher Rolland (Senior Equity Analyst)
Thanks, Brian. Appreciate it.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Quinn Bolton from Needham & Company. Your question, please.
Quinn Bolton (Managing Director of Equity Research)
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, that ramp, I think you said, towards the end of 2025. But just wondering if you could give us any more color, you know, 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 (CEO)
Right. So, I talk about the several design win with a Chinese Tier 1 for this Level 2+ application, and the application is very specific, which is Smart ADAS plus parking for the Chinese market. We believe this is going to be a next high volume opportunity in China to replace current single-camera ADAS market. I think the price is right and feature is right, and we also have a major OEMs looking at this, evaluating the products at this point. So I think we think this is could be a as big as current ADAS market given time.
Of course, that when we're ramping up the revenue in early, in the second half of 2025, the volume will be just ramping up. But I think when that peak, I think it can be a, a significant volume for, for, for the Chinese market point of view.
Quinn Bolton (Managing Director of Equity Research)
Great. Thank you, Fermi. And then the 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 ported the Meta Llama model to the CV3 chip. Wondering, as you look out, you know, kind of what are the next steps to, you know, for that project, where are you on the software and platform development? And are you still sort of thinking of this as, you know, 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?
Fermi Wang (CEO)
Yes. So first of all, we start porting Llama 2 as soon as it become available, and I think we made great progress on that. We are in the plan to demo this Llama 2 in a chatbot demo to our customer sometime in the coming quarter. And also, I think that we continue to believe that our current CV3 represent not 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 hear the one important task is which continue to build out the software infrastructure to support customer. That's definitely another area we need we are ramping up the resource.
We talk about we only carve out a resource from the current employee pool to support the effort. But, you know, when we move forward, when we start engaging customer, provide support, customer support, we probably need to increase head count. But that's the second phase, after we start engaging customer 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.
Quinn Bolton (Managing Director of Equity Research)
Perfect. Thank you, Fermi.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Joe Moore from Morgan Stanley. Your question, please?
Joseph Moore (Managing Director)
Great. Thank you. Can you talk about how you're thinking about spending? You know, your OpEx is, at this point, close to your revenue. You know, I understand revenues are at 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?
Fermi Wang (CEO)
So Joe, I think, while you can - I think you noticed that we are, 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, to look at where we can cut and where we can save. But however, we still want to continue to invest on our strategy directions, namely a CV3 architecture, as well as, you know, for the auto and IoT, our IoT auto and LLM. But those are the three big pieces of investment area. But things before we go online, 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 strategy directions.
Joseph Moore (Managing Director)
Great, thank you. And then in terms of the video processing market that you talked about, you know, we've obviously recognized that there was gonna be a replacement cycle from, you know, 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?
Fermi Wang (CEO)
I think back what I said, in the consumer IP cam, majority of the product today is really focused on the low-end, cost, 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 it can continue to demand higher AI performance. And for the consumer IoT side, that we have a focus on the low-end SoC roadmap definitely heard us. I think that's where we have the biggest risk in terms of losing market share.
Joseph Moore (Managing Director)
Great. Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Matt Ramsey from TD Cowen. Your question, please.
Matt Ramsay (Managing Director and Senior Semiconductor Analyst)
Thank you. Good afternoon, guys. I know, forgive me for this question, but I'm 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 gonna focus them. And what I'm trying to get at is maybe one step, maybe one level of abstraction above that, is, like, the focus of the company, like, changed a lot now. I mean, it seems like there's a maybe de-emphasis of your camera business, and now a shift toward investment 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 night 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?
Fermi Wang (CEO)
Right.
Matt Ramsay (Managing Director and Senior Semiconductor Analyst)
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 (CEO)
Right. First of all, I think we continue to be committed to, you know, the IoT market. I think that this is a, 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. Also we think that we have differentiated technology as well as a big customer base, and we need to continue, we will continue to provide the solutions to our customers. So I think that is one area I will never, you know, say we take our eyes off the ball.
Given that, I think we want to continue to invest in auto, but when you say changing the auto strategy, one thing that I will say happened in the last six months is, we believe that the China market will give us earlier and shorter-term revenue than the other market. We definitely move more focus our resource to Chinese market for the CV72 and CV3. And I think that's the area we believe is can give us a faster to the revenue. But that doesn't mean we don't focus on our U.S. and Europe or other market, that we can get our CV3 design in. But obviously, those designing will take a longer time to go to revenue.
So I think it's really a focus on the short-term revenue versus a longer-term opportunities. But I will 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 will impact their business, how to use LLM as to integrate multiple cameras into the services for the service they provided to their customers, and also that automotive guys also start thinking bigger transformer model, which is kept the performance getting higher and leverage while we are invest our LLM model.
So I really think that although that LLM start with, you know, on the server side, which is definitely an interesting area for us, but it just in the last three months, when start people talk, when we start talking to our existing customer, it become very clear that LLM is also on the roadmap for all our existing customer. So LLM become a roadmap, uh, for us, is not just an opportunity we can, you know, choose to invest or not. I hope this has clarified your question.
Matt Ramsay (Managing Director and Senior Semiconductor Analyst)
No, thank you, Fermi, for all the color there. I appreciate it. I guess as my follow-up question, you mentioned there's gonna be different phases of your new investment around inference and LLM. Have you guys thought about sizing some of those investment areas? I mean, 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? Thanks.
Fermi Wang (CEO)
Right now, so for the current phase, I we talk about we only carve out a team that we 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 size of team to support the LLM. So we are talking about, you know, anywhere from 60-80 people total to support a limited engagement for the customer. Like, our goal is not going to all the possible customer, like we said last time. We we need to prove the concept and with several customer that 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 site, so to limit the scope, and we think that we can fund this activity with our P&Ls.
Matt Ramsay (Managing Director and Senior Semiconductor Analyst)
Got it. I'll jump back in the queue. Thank you very much.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.
Ross Seymore (Managing Director)
Hi, guys. Thanks for taking the question. Now, I wanted 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 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'll snap back?
Fermi Wang (CEO)
Right. So first of all, I think that, for the short-term side, we definitely believe that, it's a... I think the question is related to-
Brian White (CFO)
Yeah, I think your, your, 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. You know, we're seeing obviously some significant rebalancing of inventory and orders, you know, 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 (CEO)
Right. On the second part is really whether that, the video processor side. I think that video processor side is definitely part of the weakness we talk about in the consumer IP camera 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 Seymore (Managing Director)
And then I guess as my follow-up, and, and forgive me, I guess there were kind of three here. As, as we look at the growth for fiscal year 2025, you know, you said that the video processor will still go down. What do you think are the key growth drivers in your CV business that we should look forward to? You know, 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 (CEO)
So for the CV side, I definitely believe that both when inventory burns through, as well as our new project, like CV5, 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 IP camera 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.
Ross Seymore (Managing Director)
Thank you.
Operator (participant)
Thank you. One moment for our next question... Our next question comes from the line of Tristan Gerra from Baird. Your question, please.
Tristan Gerra (Senior Research Analyst)
Hi, this is 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 ODMs 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 (CEO)
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 as planned. So although we see some weakness, but it's not, like I said, you know, IoT is really the main problem we are dealing with right now.
Tristan Gerra (Senior Research 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 are, you play in, including data recorders?
Fermi Wang (CEO)
Right. So obviously, the CV3 design will take much longer than our recorders in the past. Recorders in the past was like 18 months, even its auto grades, 18 months of design cycles. Here, outside China, we talk about four years. That's the reason we decide 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 as the issue. So for that, we talk about CV72 most likely will have 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.
Tristan Gerra (Senior Research Analyst)
Okay, great. Thank you for the questions.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Tore Svanberg from Stifel. Your question, please.
Tore Svanberg (Managing Director and Senior Analyst)
Yes, thank you. Fermi, just back to sort of the resources and the opportunities, and specifically thinking about CV3, the leverage of the software, because, you know, we're talking about auto, right? But at the same, 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, you know, with your current investments, so that, you know, you don't have to go through a completely new investment cycle, if you will.
Fermi Wang (CEO)
Right. So we don't plan to have a brand new investment cycle. With our current resource, 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. And that's what we talk about in the past, right? We talk about that we were - we are working with Continental on 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 VisLab, we are at a stage that ready to demo our next generation of software stack.
So from the development point of view, software side, we are—I think we definitely not only prove that we have enough resource, but we're finishing the work to some extent. So now the issue is with LLM. Also, we funded our first phase of LLM investment based on our current resource and leveraging a lot of investment we're putting to 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, you know, 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 if 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 the next generation roadmap for the silicon side, and that this will leverage 100% of existing VSI team. So any new development or new investment cycle for LLM is a software team to support customer. I hope that clarify the question.
Tore Svanberg (Managing Director and Senior Analyst)
Yeah, no, absolutely. And, and I also wanted to follow up on, I think it was a previous question about, you know, LLM or AI accelerator milestones. So, you know, what, what kind of milestones, as, as investors, should we be looking at here? I obviously understand the timing part of it, but, you know, what, what are some of the more specific milestones that we should be keeping an eye on?
Fermi Wang (CEO)
I think the first important milestone is that we demo our chatbot demos to our customers, and it will happen sometime 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.
Tore Svanberg (Managing Director and Senior Analyst)
Very helpful. Thank you, Fermi.
Fermi Wang (CEO)
Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Kevin Cassidy from Rosenblatt. Your question, please?
Kevin Cassidy (Managing Director and Senior Research Analyst)
Yeah, thanks for taking my question. My question is also along the lines of the software stack. With the CV 72 in China, how much of the software stack you developed it? Is there a component of that? Can you sell that software stack, too?
Fermi Wang (CEO)
Yeah. So there are two. 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 software partners, and they are porting aggressively their software to our CV72 platform, hardware platform, and they're 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 talk 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 what we have developed. This software stack, we will talk about 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 the BSC level. And I think this is definitely one thing we need to talk about, not only technology, but also, also our business, our business, our business model, when we are ready, sometime in the near future.
Louis Gerhardy (VP of Corporate Development)
Yeah, Kevin, I'll just add, next week, September fifth to eighth, 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 Cassidy (Managing Director and Senior Research Analyst)
Okay, great to know. Yep, we'll, we'll look for that. Maybe along those lines of demos and your work with Conti, is there any update of, you know, how many OEMs you're talking to and, you know, any progress at all? You can give an update.
Fermi Wang (CEO)
We announced one design win last time, and this time we have continued to engage multiple OEMs with a potential collaboration with Conti, but also independent that we also talk to OEM directly. So we still continue to have engagement, multiple engagement with OEMs at this point.
Kevin Cassidy (Managing Director and Senior Research Analyst)
Okay, thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Suji Desilva from Roth. Your question, please.
Suji Desilva (Managing Director and Senior Research Analyst)
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, either currently or kind of when it normalizes between auto and IoT? Because it sounds like those two categories are having different trends right now, and I think it'd be helpful to understand kind of where each one sits in your revenue today and maybe in a year or so when things normalize.
Brian White (CFO)
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 has been much more volatile to the downside, that mix is looking more like seventy percent IoT and thirty percent automotive, for the current year. Obviously, we've said that the size of our SAM that we're pursuing over a multi-year time period is much more levered to automotive, where, you know, it would be the inverse of that relationship, where long term, we would expect automotive to be about seventy percent and IoT about thirty percent as we move out, you know, several years in the future, as we get traction with CV3 and some of the other automotive solutions.
Suji Desilva (Managing Director and Senior Research Analyst)
Okay. Thanks, Brian. 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 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 in any way because of what's going on right now. Thanks.
Fermi Wang (CEO)
So I think that if you talk about the funnel number, we talk about. So funnel for the very near term, for example, if you talk about the funnel for this year, definitely there's some impact for the inventory. But in general, I don't think there's a—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 wins. So we will—we'll be ready to talk about this number in November this year.
Suji Desilva (Managing Director and Senior Research Analyst)
Fermi, can you just give us an idea of what years those start to kind of come in, the elbow of those? Like, how many years away that is?
Louis Gerhardy (VP of Corporate Development)
Well, our funnel, Suji, is six years, and given the time it takes to land some of these wins, and particularly with CV3, you know, it was back-end loaded in the latter half of those six years.
Suji Desilva (Managing Director and Senior Research Analyst)
Okay, great. Thanks a lot.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Gary Mobley from Wells Fargo. Your question, please.
Gary Mobley (Executive Director and Senior Analyst)
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 healthy or not? And to give us a sense of the driver of the 20% sequential revenue decline expected for the third quarter, how many customers are driving that down, or is it, you know, isolated in just one or two?
Fermi Wang (CEO)
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 OEMs customers have 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 type of, any of, of our top customers, all of them have inventory problems.
Gary Mobley (Executive Director and Senior Analyst)
Okay.
Fermi Wang (CEO)
Maybe at a different degree. Yeah.
Gary Mobley (Executive Director and Senior Analyst)
I'm sorry, go ahead, Fermi.
Fermi Wang (CEO)
I'm just saying that maybe they have different degrees of inventory, but all of them have some significant inventories.
Gary Mobley (Executive Director and Senior Analyst)
Okay, thank you. To follow up, I wanted to ask about your relationships with Bosch and some other China Tier 1 partners for CV3. Where, where do those stand relative to how Continental's moving along?
Fermi Wang (CEO)
So I think in China, we focus on, you know, working with the Chinese Tier 1s as a first priority, and also with Conti and Bosch. So I think that those are the priorities we have. And we definitely have a, continue to have appeal, some, RFQ from OEMs through those Tier 1s. CV72, because this is really, the silicon is not ASIL, but is a system ASIL solution, this is definitely a Chinese Tier 1 play. For Bosch and Conti, we'll, we'll focus on the CV3 levels of a solution to Chinese market right now. And we, we definitely have a, have multiple discussion with, Bosch and Conti on this.
Gary Mobley (Executive Director and Senior Analyst)
Thanks, Fermi. Thanks, Fermi.
Operator (participant)
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 (CEO)
Thank you, everybody, for joining us today, and looking forward to talk to you soon. Thank you.
Operator (participant)
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.