Executive Summary / Key Takeaways

• Ambarella is successfully executing a strategic pivot to become a leader in edge AI processing, leveraging its differentiated CVflow architecture and new product families (CV5, CV7, CV3-AD, N1) to drive significant revenue growth despite broader market headwinds.
• The company is experiencing a strong recovery from cyclical inventory correction, with recent results showing robust sequential and year-over-year growth, fueled by increasing shipments of higher-value AI inference processors and NRE project revenue.
• Ambarella's AI revenue is at record levels, now representing over 75% of total revenue, contributing to a higher blended average selling price and positioning the company to capitalize on the proliferation of AI inferencing across diverse IoT and Automotive applications, including emerging generative AI workloads at the edge.
• Key design wins, particularly the first passenger vehicle win for the CV3-AD family and expansion in commercial vehicle and enterprise markets, validate the company's technology and provide a foundation for future growth waves, expected to commence with CV7 production ramping at the end of FY25 and CV3-AD in CY26/FY27.
• While geopolitical uncertainty and slower-than-anticipated Level 2+ automotive adoption present risks, Ambarella's focus on power efficiency, scalability, and software solutions addresses key customer pain points and differentiates it from larger competitors, supporting management's increased FY26 revenue growth outlook and goal of achieving positive earning leverage.

Ambarella's Edge AI Transformation

Ambarella, Inc., founded in 2004, initially built its business on developing low-power semiconductor solutions for video and image processing in human viewing applications like security cameras and consumer devices. Over time, the company recognized the burgeoning potential of artificial intelligence at the edge and embarked on a significant strategic transformation. This pivot centered on integrating advanced AI processing capabilities with its core video expertise through the development of its proprietary CVflow architecture. This evolution has reshaped Ambarella into a provider of system-on-a-chip (SoC) solutions designed for AI inference in diverse edge applications, including video security, advanced driver assistance systems (ADAS), autonomous driving, and industrial robotics.

This strategic shift positions Ambarella in a highly competitive semiconductor landscape, facing off against larger, more diversified players like NVIDIA (NVDA), Intel (INTC), and Qualcomm (QCOM), as well as specialized competitors in specific niches. NVIDIA, a dominant force in high-performance AI, offers superior raw processing speed but often at higher power consumption. Intel, with its broad portfolio and manufacturing scale, competes across various computing segments. Qualcomm leverages its strength in mobile and connectivity to integrate AI into consumer and automotive platforms. Ambarella differentiates itself by focusing intensely on power efficiency and integrating image processing, video encoding, and AI acceleration onto a single chip. This integrated, low-power approach provides a distinct advantage in edge devices where energy consumption and system cost are critical constraints. While Ambarella's scale and financial resources are smaller compared to these giants, its specialized focus allows it to target specific performance-per-watt advantages and develop tailored solutions that can offer lower total cost of ownership for certain edge AI applications.

Central to Ambarella's competitive strategy is its differentiated technology platform, particularly the CVflow architecture. This proprietary deep learning accelerator is designed for efficient AI inference processing at the edge. Unlike general-purpose processors or add-on accelerators, CVflow is tightly integrated with Ambarella's video and image signal processing pipelines. This integration enables capabilities like real-time object detection, classification, tracking, and advanced image enhancement directly on the chip, with high performance and low power consumption. The third generation of CVflow technology, integrated into the CV3-AD and CV7 series, extends support to more complex AI workloads, including transformer networks, which are foundational for emerging generative AI applications like Vision Language Models (VLM) and Large Language Models (LLM) at the edge. This capability is highly sought after for applications requiring sophisticated scene understanding and interaction without relying on cloud processing, offering benefits in terms of privacy, latency, and bandwidth. While specific quantifiable performance metrics comparing CVflow directly against competitors' architectures across all workloads are not consistently detailed, management emphasizes its efficiency for edge deployment and its ability to handle advanced AI networks, suggesting a focus on performance-per-watt and integrated functionality as key differentiators. The company's investment in developing a 2-nanometer process node is aimed at further enhancing performance and efficiency for future AI platforms and workloads.

Performance Reflecting Strategic Momentum

Ambarella's recent financial performance underscores the impact of its strategic focus and the recovery from a cyclical downturn that affected revenue in fiscal year 2024. For the three months ended April 30, 2025 (Q1 FY26), the company reported revenue of $85.9 million, a significant increase of 57.6% compared to the same period in the prior fiscal year. This growth was primarily driven by higher product unit shipments and an increased percentage of sales from higher-value AI inference processors, which contributed to a higher average selling price. Higher nonrecurring engineering (NRE) project service revenue also played a role.

The increased revenue directly contributed to a reduction in the operating loss, which decreased from $39.4 million in Q1 FY25 to $25.9 million in Q1 FY26. This improvement in operating performance, despite an increase in operating expenses (totaling $77.4 million in Q1 FY26 vs. $72.6 million in Q1 FY25), highlights the leverage potential as revenue scales. The increase in operating expenses was primarily due to higher personnel costs associated with increased headcount and additional engineering expenses for ongoing chip development projects, reflecting the company's continued investment in R&D ($58.8 million in Q1 FY26 vs. $54.1 million in Q1 FY25) to fuel future growth.

Gross margin for Q1 FY26 was 60.0%, a slight decrease from 60.9% in the prior year period. This was attributed primarily to higher manufacturing costs associated with advanced process technologies and lower sales of previously reserved inventory, partially offset by high-margin NRE revenue. While quarter-to-quarter gross margin can fluctuate based on product mix, management maintains a long-term target range of 59% to 62%, suggesting confidence in maintaining profitability as new products scale.

The company's liquidity remains solid, with cash, cash equivalents, and marketable debt securities totaling approximately $259.4 million as of April 30, 2025. Operating cash flow turned positive, providing $14.8 million in cash from operations for the three months ended April 30, 2025, a significant improvement from a cash outflow of $15.0 million in the prior year period. This was driven by the reduced net loss (adjusted for non-cash items), improved accounts receivable collections, and increased liabilities related to vendor payments, partially offset by higher inventory purchases to meet anticipated demand. The company's history of generating positive free cash flow (16 consecutive years through Q1 FY26) provides a degree of financial stability to fund its strategic R&D investments and manage operations.

Strategic Execution and Future Outlook

Ambarella's strategic narrative is centered on capitalizing on the proliferation of AI at the edge through successive waves of new product introductions. The first wave, driven by the 5-nanometer CV5 family, is currently underway and continues to ramp, with the company expecting to ship over 1 million units in fiscal year 2025 across more than 1,000 design wins in both IoT and automotive markets. This ramp is a key contributor to the recent revenue growth and increasing average selling price.

The second wave is anticipated from the CV7 family, expected to enter production at the end of fiscal year 2025. This family targets both auto and IoT applications and is designed to support more advanced AI networks like CLIP and Vision Language Models (VLM), initially via software upgrades after deployment. This positions Ambarella to address emerging generative AI applications at the edge, a market segment management sees expanding into edge infrastructure beyond traditional endpoints. The company is actively developing a new AI SoC family specifically for this edge infrastructure opportunity, leveraging its third-generation AI accelerator.

The third and potentially most significant wave is the CV3-AD family of AI central domain controllers for Level 2+ and higher levels of automotive autonomy. While the global automotive market faces headwinds, including slower-than-expected L2+ adoption and project delays, Ambarella has secured key design wins for CV3-AD, including its first passenger vehicle win with a top five new EV company in China and an additional win in the commercial vehicle market with SANY Corporation. These wins, expected to commence production in calendar year 2025 or 2026 (fiscal year 2027 for the first full year of production), are considered meaningful and material, validating Ambarella's technology and providing a foundation for future automotive growth. The CV3-AD platform's emphasis on power efficiency, scalability (allowing software reuse across vehicle tiers), and support for advanced frameworks like BEV former are designed to address critical pain points for automotive OEMs.

Based on the strong performance in Q1 FY26 and improved visibility, Ambarella has increased its fiscal year 2026 revenue growth estimate to a range of 19% to 25%, with a midpoint of approximately $348 million. The outlook for Q2 FY26 anticipates revenue between $86 million and $94 million, with sequential growth expected in both IoT (mid-single digits) and Auto (slightly up). Non-GAAP gross margin for Q2 FY26 is guided between 60.5% and 62%. Non-GAAP operating expenses are expected to increase to $52.5 million to $55.5 million, reflecting continued investment in new product development, including the new AI SoC for edge infrastructure, and the impact of foreign exchange fluctuations. Management's guidance reflects confidence in the continued ramp of new products and the underlying secular trend of AI adoption at the edge, although geopolitical uncertainty remains a factor influencing the breadth of the guidance range.

Risks and Challenges

Despite the positive momentum, Ambarella faces notable risks and challenges that could impact its trajectory. Geopolitical uncertainty, particularly concerning U.S.-China relations and potential export restrictions, remains high and is a key factor built into the company's guidance range. While management does not anticipate a material direct impact from current tariffs, the potential for indirect impacts or future restrictions could create short-term surprises and affect customer relationships, especially given the company's significant business operations, customer base, and manufacturing suppliers in Asia, including Taiwan and China.

The global automotive market, a key growth area for Ambarella, is currently under pressure. Slow vehicle production growth, a shakeout among EV OEMs, and slower-than-expected adoption rates for Level 2+ autonomy have led to project delays and cancellations, impacting the growth rate of Ambarella's automotive funnel. While the company believes its CV3 platform addresses key OEM challenges, the pace of adoption remains a risk.

Ambarella's dependence on a limited number of customers and third-party manufacturers also presents vulnerabilities. A substantial portion of revenue is processed through a single distributor (WT Microelectronics), and the loss of this relationship could disrupt shipments. Reliance on third parties for wafer fabrication, assembly, and testing without long-term supply contracts exposes the company to risks of capacity constraints, price increases, manufacturing defects, and disruptions.

Furthermore, operating in a highly competitive semiconductor market characterized by rapid technological change and pricing pressure requires continuous, substantial investment in R&D. Failure to anticipate or timely develop new solutions, or inability to manage product transitions effectively, could harm the company's competitive position and financial results. Cybersecurity risks, including potential breaches of security systems or those of third-party vendors, also pose a threat to operations and reputation.

Conclusion

Ambarella is demonstrating tangible progress in its transformation into a leading provider of edge AI semiconductor solutions. The company's strategic focus on developing differentiated, low-power AI SoCs through its CVflow architecture is yielding results, evidenced by record AI revenue, increasing average selling prices, and robust growth driven by new product ramps like the CV5 family. Key design wins in the automotive and enterprise markets validate the technology and build a foundation for future growth waves from the CV7 and CV3-AD families, positioning Ambarella to capitalize on the expanding opportunity for AI inference and generative AI at the edge.

While macroeconomic headwinds, geopolitical uncertainties, and challenges in the automotive market persist, Ambarella's technological advantages in power efficiency, scalability, and integrated processing offer a compelling value proposition that helps differentiate it from larger competitors. The company's increased fiscal year 2026 revenue growth outlook and focus on driving positive earning leverage signal confidence in its ability to navigate these challenges and convert its strategic investments into financial performance. For investors, the story hinges on Ambarella's continued execution in ramping its new product portfolio, securing further design wins in key markets like Level 2+ automotive, and successfully expanding into emerging areas like edge infrastructure and generative AI applications, leveraging its unique technological strengths in a competitive landscape.