Ambarella's Q2 2026: Contradictions Emerge on Edge Infrastructure vs. Automotive, Seasonality, and Margin Forecasts

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

Date of Call: August 28, 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 per diluted share (non-GAAP)
• Gross Margin: 60.5%, at the low end of prior guidance (60.5%–62%) due to product mix

Guidance:

• Q3 revenue expected at $100M–$108M (midpoint $104M)
• Q3 auto revenue to grow mid- to high-single digits sequentially; IoT up mid-teens
• FY26 revenue growth raised to 31%–35% (midpoint ≈$379M), implying record FY revenue
• Q3 non-GAAP gross margin expected at 60%–61.5%
• Q3 non-GAAP OpEx expected at $54M–$57M (higher on new product development)
• Q3 net interest and other income ≈$2M; non-GAAP tax ≈$0.8M; diluted shares ≈43.7M
• Seasonal pattern implies a typical Q4 downtick

Business Commentary:

• Revenue and Guidance Growth:
• Ambarella, Inc. reported revenue of $95.5 million for Q2 2026, which was above the high end of their prior guidance range and increased 11.2% sequentially.
• The company raised their fiscal 2026 revenue growth estimate from a range of 19% to 25% to 31% to 35%, indicating strong performance.

• This growth was driven by increased demand for edge AI solutions and a firm order book, as well as higher average selling prices.

• IoT and Automotive Market Dynamics:

• IoT revenue represented more than 75% of Ambarella's Q2 2026 revenue, with an increase in the low-teens range sequentially.
• The automotive segment grew in the mid-single digits.

• While automotive remains a key area, IoT has outperformed due to shorter design cycles and a broader range of edge AI applications.

• Edge AI and New Market Penetration:

• Ambarella announced significant progress in new edge AI markets, including portable video and robotics, with high-volume shipments anticipated this fiscal year.
• The company's CV5 AI SoC was used in Arashi Vision's aerial drone, showcasing the expansion of AI capabilities in IoT devices.

• The company's N1-655 SoC marked its first win in the edge AI infrastructure market, reflecting the broadening applications of edge AI.

• Operating Expenses and Forward Outlook:

• Non-GAAP operating expenses for Q2 were $53.4 million, below the midpoint of their prior guidance range, primarily due to lower engineering costs.
• For Q3, non-GAAP OpEx is expected to be in the range of $54 million to $57 million due to new product development costs.
• The increase in OpEx is attributed to investments in new product development and expanding edge AI applications.

Sentiment Analysis:

• “Revenue of $95.5 million, increasing 11% sequentially… above the high end of our prior guidance.” “Fifth consecutive quarter of record edge AI revenue.” “Increasing our fiscal 2026 revenue growth estimate to a range of 31% to 35%… midpoint ≈$379 million.” “In Q3, we forecast revenue in the range of $100 million to $108 million.”

Q&A:

• Question from Christopher Rolland (Susquehanna): Will you pivot investment toward IoT given its outperformance, and when could auto outgrow IoT?
  Response: Ambarella will invest in both; IoT grows faster near term due to shorter cycles, while auto could outgrow IoT around 2027–2028 with major OEM wins.

• Question from Christopher Rolland (Susquehanna): Should we expect auto to outgrow IoT next year, or only when CV3 ramps later?
  Response: Not next year; auto outperformance depends on securing large OEM programs, likely 2027–2028.

• Question from Kevin Cassidy (Rosenblatt Securities): Is the aerial drone opportunity broad-based and commercial, beyond Insta360?
  Response: Yes; multiple companies are pursuing autonomous drones for consumer and commercial uses, and Ambarella is engaged in multiple design wins.

• Question from Kevin Cassidy (Rosenblatt Securities): Is your move to 2nm still on track?
  Response: Yes; 2nm development remains on track with production for customers targeted in early 2027.

• Question from Shadi Mitwalli (Needham & Company): Q3 guide implies a seasonally down Q4; why the conservatism?
  Response: Seasonality is increasing due to more consumer-driven products; the pattern aligns with typical seasonal demand.

• Question from Shadi Mitwalli (Needham & Company): How fast will non-security IoT grow vs. security, and could it surpass it?
  Response: Non-security IoT (portable video, drones, edge infrastructure) is growing faster and expanding mix, though security remains large.

• Question from Liam Pharr (BofA Securities): Any comment on M&A consolidation and your stance if independent?
  Response: No comment on rumors; focus remains on edge AI leadership with 36M+ edge AI SoCs shipped.

• Question from Liam Pharr (BofA Securities): Which segment drives upside through 2026, IoT or auto?
  Response: Both should grow, but near-term upside is IoT; auto step-up requires L2+/L3 OEM wins.

• Question from Kyle Smith (Stifel): How do you check for tariff-driven pull-ins or abnormal demand?
  Response: Monthly inventory reviews with customers/distributors and internal order-pattern checkpoints show no meaningful inventory build.

• Question from Kyle Smith (Stifel): Feedback on the Cooper development platform?
  Response: Very positive; unified HW/SW eases reuse across chips, with strong SDK, model garden, and compiler support.

• Question from Kyle Smith (Stifel): Should we model OpEx growth modestly above 10%?
  Response: Yes; ~12% YTD and likely to remain in that range.

• Question from David O’Connor (BNP Paribas Exane): Any change in OEM posture on L2+ ADAS adoption?
  Response: OEMs prioritize safety and lower-cost L2+; opportunities skew to lower-end ADAS features with longer decision cycles.

• Question from David O’Connor (BNP Paribas Exane): How is FY growth split between units and ASP?
  Response: Approximately 50% units and 50% ASP.

• Question from Gus Richard (Northland Capital Markets): IoT split between security and non-security, and fastest-growing non-security apps?
  Response: Portable video is fastest; drones could become significant; auto was low 20% of revenue in Q2, with IoT the balance.

• Question from Gus Richard (Northland Capital Markets): Is field engineering a constraint given diverse IoT apps?
  Response: Unified platform lets FAEs scale across apps; Ambarella is adding field engineers to support growth.

• Question from Zhihua (Martin) Yang (Oppenheimer & Co.): Is portable video strength concentrated in one customer?
  Response: Multiple customers contribute; Insta360 is largest, moving from H22 to CV5 raised ASPs.

• Question from Zhihua (Martin) Yang (Oppenheimer & Co.): Does guidance assume normal business with Insta360 despite a U.S. lawsuit?
  Response: Guidance is based on received purchase orders; no judgement on lawsuit outcomes.

• Question from Richard Shannon (Craig-Hallum): Describe the edge infrastructure pipeline and use cases for N1-655.
  Response: Multiple engagements; first design win secured; appliances aggregate endpoints and run LLM/VLMs; SAM ~$125M in FY26 growing to ~$500M in 5 years.

• Question from Richard Shannon (Craig-Hallum): Portable video mix—consumer vs. enterprise?
  Response: Weighted to consumer overall; body-worn is more enterprise; consumer bias accelerates revenue ramp.