When Ambarella (NASDAQ: AMBA) announced fiscal third-quarter 2018 results last week, shares of the video-processing chip specialist soared more than 16% the following day. But Ambarella's performance certainly didn't look good at first glance. Revenue fell 11.4% year over year to $89.1 million, which translated to a 32.4% decline in adjusted earnings per share to $0.75.
Still, revenue arrived well within Ambarella's latest guidance, and the bottom line was comfortably ahead of Wall Street's prediction for earnings of $0.67 per share.
Of course, this illustrates the need for investors to dig deeper in an effort to better understand Ambarella's underlying business. So let's take a closer look at five important points that Ambarella management discussed during the quarter's subsequent conference call.
1. Non-GoPro revenue streams are (mostly) solid
Said Ambarella CEO Dr. Fermi Wang:
Although our revenue was lower than last year, our non-GoPro revenue was 7.2% higher, and we enjoyed strong design-win momentum in our target IP security and automotive camera markets. ... In Q3 we saw strong year-over-year growth in IP security, followed by in-line growth in auto and non-GoPro wearable markets, partially offset by a moderate year-over-year decline in drone revenues.
As GoPro's (NASDAQ: GPRO) former video-processing chip supplier of choice, the action-camera company previously represented as much as a third of Ambarella's revenue in any given quarter. But GoPro opted to engineer its own chip, dubbed the "GP1," for its latest HERO6 camera line -- a move which Ambarella management warned earlier this year would hurt sales in the second half.
Revenue from GoPro fell 47% year over year this quarter, to $18.4 million, or 20% of total sales. But Ambarella's efforts to differentiate into the IP security and automotive OEM markets have helped spur those declines. That said, although Ambarella's chips still have homes in many higher-end drones, the rise of cheaper drones and softness at tier 2 drone customers have hurt flying-camera chip sales.
2. On getting its first computer-vision chip into customers' hands
Dr. Fermi Wang:
During the third quarter we demonstrated and assembled our new CV1 chip to key IP security and automotive customers. Based on our CV4 architecture, CV1 combines Ambarella's traditional strengths in high-resolution imaging for camera[s] capturing video to be watched by humans ... with the stereovision and the new-level processing required for advanced motion vision. ... As an update, CV1 has met our aggressive targets for features, performance, and power consumption.
Ambarella told investors in September that it was set to begin sampling the CV1 chip (the "CV" stands for "computer vision") at key customers by the start of the fiscal fourth quarter. This means its next-generation chip is ahead of schedule, even after meeting the aforementioned "aggressive" target specifications. Looking ahead, Ambarella sees demand for chips capable of handling more complicated computer-vision tasks setting the stage for longer-term growth.
3. New computer-vision SoCs are on the way
Dr. Fermi Wang:
Beyond CV1, we remain on target to deliver a new generation of SoC [system-on-a-chip] solutions in the first half of next year that are based on the CV4 architecture. Leveraging 10-nanometer process technology, the SoCs will target high-value IP security, drone, VR, and OEM [original equipment manufacturer] automotive-camera applications. In the automotive markets, we see opportunities in multiple applications ... car recorders, electronic mirror, surround view, advanced driver-assistance systems (or ADAS), and ultimately fully autonomous vehicles.
The tech world changes quickly, so Ambarella investors should be pleased to know that the company isn't hitting the brakes on its computer-vision efforts anytime soon. These new SoCs will provide OEMs an easily integrated package to address computationally intense computer-vision tasks in new security cameras, drones, virtual reality devices, and advanced driver-assistance systems in the automotive space.
4. On the effects of continued memory shortages
Ambarella CFO George Laplante:
We continue to expect a shortage of high-speed memory to impact revenues over the next few quarters, particularly in the early part of next fiscal year. Although we have included an estimate of the expected impact of potential memory shortages to our Q4 revenue guidance, it is not yet clear to what extent revenues will be impacted in future quarters.
Memory shortages certainly won't help Ambarella's quest to return to sustained profitable growth, as the situation will impact the build schedules for key camera customers outside of GoPro. It helps, however, that Ambarella first cautioned investors about this shortage three months ago. And it's not an unprecedented situation; last year's earthquakes resulted in similar disruptions, following shortages of certain image sensors. In any case, this is a temporary issue that should be resolved within the next few quarters.
5. On Ambarella's long-term relationship with GoPro
At this point not much has changed as it relates to our expectations for fiscal '19. Non-GoPro revenues are estimated to grow in the range of 10%, which assumes growth in security, auto, and wearable markets, including non-GoPro sports cameras, offset by lower revenues in the consumer drone market. Although we expect some revenues from GoPro, we lack clear visibility, and therefore, [are] unable to provide guidance at this time.
To be clear, GoPro hasn't completely abandoned Ambarella yet. In fact, early in the call management said that GoPro's new Fusion 360-degree camera is based on an Ambarella SoC. Ambarella's chips are also still found in GoPro's previous-generation HERO5 cameras.
But the HERO5 will be phased out some time next year. Combined with uncertain early demand for GoPro's Fusion, and GoPro's in-house chip in its HERO6 line, it's prudent for Ambarella management to continue distancing themselves from this formerly lucrative customer relationship.
The bottom line
Despite its GoPro-related declines, Ambarella has continued to make strides in diversification while planting seeds for future growth in the computer-vision market. So while this quarter's results were far from perfect, they were exactly what Ambarella shareholders had wanted to hear. With shares down slightly from the start of the year leading up to last week's announcement, it was no surprise to see investors so aggressively bidding up Ambarella stock in response.
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