Ambarella's Q2 2026: Contradictions Emerge on Auto vs. IoT Strategy, Seasonality, and Tariff Impact

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 29, 2025

Financials Results

• Revenue: $95.5M, up 11.2% sequentially and up 49.9% YOY; above the high end of prior guidance ($86M–$94M)
• EPS: $0.15 non-GAAP per diluted share (net profit $6.4M)
• Gross Margin: 60.5%, at the low end of prior guidance (60.5%–63.0%) due to product mix

Guidance:

• Q3 FY26 revenue expected at $100M–$108M (midpoint $104M).
• Q3 non-GAAP gross margin expected at 60.0%–61.5%.
• Q3 non-GAAP OpEx expected at $54M–$57M (driven by new product development).
• Q3 net interest/other income about $2M; non-GAAP tax ~$0.8M; diluted shares ~43.7M.
• Sequentially in Q3: Automotive up mid-to-high single digits; IoT up mid-teens.
• FY26 revenue growth outlook raised to 31%–35% (~$379M midpoint).
• Seasonality implied for Q4 due to consumer-driven product cycles.

Business Commentary:

• Revenue Growth and AI Expansion:
• Ambarella reported revenue of $95,500,000 for Q2 FY2026, up 11% sequentially and 49.9% year-on-year.

• The growth was driven by strong demand for AI solutions, particularly in portable video and robotic drone markets.

• IoT Segment Growth:

• The IoT segment represented more than 75% of total revenue in Q2 FY2026, with growth in the low teens.

• This was attributed to the adoption of edge AI in applications like portable video and the ramp-up of product shipments by customers.

• Automotive Market Performance:

• Automotive revenue increased in the mid-single digits, with IoT growth in the low teens.

• The automotive segment faced slower L2+ adoption rates due to OEMs optimizing for cost, but there is potential for growth with new design wins in the future.

• Portable Video Market Strength:

• Portable video applications, including products by Insta360, showed strong growth, contributing significantly to Ambarella's revenue.

• This growth was driven by increased ASP and unit shipments, especially in the consumer market.

• Robotic Aerial Drone Emergence:

• New design wins in the robotic aerial drone market, such as with Insta360, contributed to Ambarella's revenue.
• The interest in autonomous drones and their applications is gaining traction, similar to trends in autonomous vehicles, leading to increased demand for AI solutions.

Sentiment Analysis:

• Revenue beat above guidance with $95.5M (+49.9% YOY). Fifth consecutive quarter of record Edge AI revenue. FY26 growth outlook raised to 31%–35% (CEO: midpoint raised by ~9%). Strong Q3 guide ($100M–$108M) with IoT up mid-teens and auto up mid-to-high single digits. Non-GAAP profitability achieved ($0.15 EPS) and cash/marketable securities rose to $261.2M.

Q&A:

• Question from Christopher Rolland (Susquehanna): Are you pivoting investment toward IoT given its outperformance versus auto, and when could auto outgrow IoT?
  Response: No pivot—Ambarella will invest in both; shared architecture drives OpEx leverage. IoT grows faster near term; auto expected to outgrow IoT around 2027–2028 when major L2+/L3 OEM wins ramp.

• Question from Kevin Cassidy (Rosenblatt Securities): Is drone demand broadening and is 2nm still on track?
  Response: Drone interest is expanding across regions and use cases; Insta360 is an early high-volume win. 2nm program remains on track with foundry partner for early 2027 production.

• Question from Shadi (Needham & Company) for Quinn Bolton: Q3 guide implies seasonal Q4—why conservative, and outlook for non-security IoT vs. security?
  Response: Seasonality reflects consumer-driven cycles; not unusually conservative. Non-security IoT (e.g., portable video, drones, edge infrastructure) is growing faster than security, though security remains solid.

• Question from Liam (Bank of America): Any comment on M&A rumors and how you compete if independent?
  Response: No comment on rumors; Ambarella’s 36M+ Edge AI SoCs shipped and focused Edge AI strategy position it as a category leader.

• Question from Liam (Bank of America): Sustainability of IoT and auto growth into 2026; where’s the upside?
  Response: IoT strength continues with multiple products ramping; auto growth hinges on securing L2+/L3 domain-controller wins; both expected to grow.

• Question from Kyle Smith (Stifel): Any demand pull-ins or inventory builds tied to tariffs/geopolitics?
  Response: Monthly checks with customers/distributors show no meaningful excess inventory; internal order-pattern monitoring also indicates inventories are normal.

• Question from Kyle Smith (Stifel): Customer response to the Cooper development platform and OpEx outlook?
  Response: Cooper is well-received for unified HW/SW, SDK, model garden, and compiler portability across chips. Non-GAAP OpEx growth likely slightly above 10% (~12% this year).

• Question from David O’Connor (BNP Paribas): State of L2+ ADAS adoption and implications for CD3 wins?
  Response: OEMs prioritize safety and cost, biasing toward lower-end L2+ and ADAS; decisions are infrequent and delayed, but lifetime revenue potential remains significant.

• Question from David O’Connor (BNP Paribas): FY26 growth split—units vs. ASP?
  Response: Approximately 50/50 between unit growth and ASP increases.

• Question from Gus Richard (Northland Capital Markets): IoT mix—security vs. non-security, and fastest-growing areas?
  Response: Portable video is fastest-growing; drones could follow. In Q2, auto was low-20% of revenue; IoT was the balance.

• Question from Gus Richard (Northland Capital Markets): Do you need more FAEs to support diverse IoT apps?
  Response: Unified platform lets FAEs scale across customers; Ambarella is adding field engineers as part of its growth plan.

• Question from Martin Yang (Hopco): Is portable video growth concentrated in one customer, and any risk from Insta360’s lawsuit?
  Response: Multiple customers contribute, though Insta360 is largest and moved to higher-ASP CV5. Guidance reflects POs received; no view on legal outcomes.

• Question from Richard Shannon (Craig Hallum): Edge AI infrastructure pipeline and SAM outlook?
  Response: First win on N1-655; strong interest from new and existing customers. SAM estimated at ~$125M in FY26, growing to ~$500M in five years; supports higher ASPs.

• Question from Richard Shannon (Craig Hallum): Portable video—consumer vs. enterprise mix?
  Response: Overall weighted to consumer (e.g., action/panorama), though some categories like body-worn are enterprise/public safety.