Ambarella, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended April 30, 2018, Ambarella’s fiscal first quarter of fiscal 2019; comparisons are with the three months ended April 30, 2017. Ambarella develops video, image-processing and computer-vision system-on-chip solutions for camera and infrastructure applications, including security, automotive, wearable and drone markets.
Key financial metrics
| Metric | Quarter ended April 30, 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $56.9 million | $64.1 million |
| Gross profit; gross margin | $34.9 million; 61.3% | $41.0 million; 63.9% |
| Operating income (loss) | $(10.0) million | $2.6 million |
| Net income (loss) | $(10.0) million; $(0.30) per diluted share | $2.6 million; $0.07 per diluted share |
| Cash provided by operating activities | $0.1 million | $23.0 million |
At April 30, 2018, cash and cash equivalents were $336.7 million, marketable securities were $77.4 million, and total cash, cash equivalents and marketable securities were approximately $414.1 million. Current assets were $466.6 million and current liabilities were $39.7 million. The filing reports no borrowings or debt balance. Total liabilities were $50.3 million.
Cash fell by $10.0 million during the quarter. Investing activities provided $9.7 million, primarily reflecting investment maturities and sales; financing activities used $19.8 million, including $20.6 million for share repurchases. Stock-based compensation was $14.2 million.
Material changes and accounting comparability
- Reported revenue declined 11.2% year over year, and gross margin fell 2.6 percentage points. Operating results moved from profit to loss, while operating cash flow declined sharply.
- Management attributed lower revenue mainly to a major drone customer shifting consumer drones to competing solutions, continued weakness among smaller drone customers, and declines in virtual-reality and non-sports wearable cameras. Growth in professional IP security, automotive and police cameras partly offset those declines.
- Research and development expense rose 19.0% to $31.7 million, reflecting higher engineering headcount, chip tape-out and development costs, including investment in computer vision and automotive and robotics applications. Selling, general and administrative expense rose 12.2% to $13.2 million.
- Ambarella adopted ASC 606 on February 1, 2018. Distributor revenue is now generally recognized on shipment to distributors (“sell-in”) rather than on shipment to end customers (“sell-through”). For this quarter, ASC 606 increased reported revenue by $4.9 million and reduced reported net loss by $3.5 million versus the amounts that would have been reported under ASC 605. Prior-year results were not restated, so the reported year-over-year comparison is not on a consistent accounting basis.
Outlook, commentary and risks
The filing gives no specific quarterly revenue or earnings guidance. Management said existing cash balances should meet anticipated cash requirements for at least the next 12 months, while expecting operating and capital expenditures to increase with hiring, business expansion and product development. It expects research and development spending to rise and stated gross margin may decline as the company expands in competitive camera markets, particularly IP security.
- Customer and channel concentration remains significant: Wintech accounted for 58% of quarterly revenue; Hakuto and Chicony accounted for 12% and 11%, respectively. Management also cited customer concentration and the risk of order changes, cancellations and inventory fluctuations.
- Third-party manufacturing is concentrated in Asia, with no long-term agreements with most key manufacturing vendors. Manufacturing purchase commitments were $32.1 million at quarter-end.
- The company recorded an $848,000 tax provision despite a pretax loss, citing geographic earnings mix and losses in jurisdictions where related tax benefits could not be recognized. Gross unrecognized tax benefits were approximately $34.7 million; tax years remain open to examination in multiple jurisdictions.
- On June 4, 2018, after quarter-end, the board authorized a further share repurchase program of up to $100 million over 12 months beginning June 5. The existing program had approximately $11.1 million available through June 30, 2018. Repurchases use working capital and are discretionary.
- Management reported effective disclosure controls as of April 30, 2018 and no material legal proceedings. The filing describes risks including competition, uncertain design-win conversion, product-market shifts, supply disruption, intellectual-property disputes and possible U.S.-China trade restrictions.
Important facts for investors to verify
- Revenue and profitability trends on a comparable basis, accounting for the ASC 606 sell-in transition and its impact on reported results.
- Whether growth in IP security and automotive cameras can offset continued weakness in drones and certain wearable-camera markets.
- Exposure to major customers and distributors, particularly Wintech, and evidence of customer demand, channel inventory and future design-win conversions.
- Cash generation, planned research and development spending, manufacturing commitments and the scale and funding of share repurchases.
- Developments in tax examinations and uncertain tax positions, including the $34.7 million of unrecognized tax benefits.