Ambarella, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended October 31, 2014; comparisons are to the same periods in 2013. Financial figures below are in U.S. dollars; millions unless otherwise stated.
Business context
Ambarella develops video-processing semiconductor solutions and sells primarily to OEMs and ODMs. Its principal markets include wearable sports cameras, automotive cameras, IP security cameras, and video infrastructure. The filing reports one operating segment.
Financial results
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $65.7 | $46.0 | $153.6 | $117.6 |
| Gross profit / margin | $41.6 / 63.3% | $29.3 / 63.7% | $97.7 / 63.6% | $74.3 / 63.1% |
| Operating income / margin | $18.7 / 28% | $10.1 / 22% | $34.7 / 23% | $22.2 / 19% |
| Net income | $18.3 | $9.1 | $32.9 | $20.1 |
| Diluted earnings per share | $0.57 | $0.30 | $1.03 | $0.68 |
- Quarterly revenue grew 42.8%; nine-month revenue grew 30.5%. Quarterly and nine-month operating income increased 85% and 56%, respectively.
- Nine-month operating cash flow was $35.8 million, up from $22.9 million. Investing used $41.8 million, primarily reflecting purchases of marketable securities; financing provided $9.2 million. Cash and cash equivalents ended at $146.6 million.
- Cash, cash equivalents, marketable securities, and restricted cash totaled $186.5 million at October 31, 2014, versus $143.4 million at January 31, 2014. Marketable securities were $40.0 million. Current assets were $246.4 million and current liabilities $42.6 million. The filing reports no debt.
- Accounts receivable was $41.0 million, up from $18.8 million at fiscal year-end; inventory was $14.8 million, up from $10.5 million.
Material changes and management commentary
- Growth was attributed mainly to demand for A5S, A7L, and A9 chips in IP security, wearable sports, and automotive cameras; new camera models from a major customer and adoption of the S2 4K UHD chip also contributed. Infrastructure revenue weakened as customers delayed H.265 network upgrades.
- Quarterly gross margin declined slightly year over year, from 63.7% to 63.3%, as higher-margin infrastructure revenue fell from 13% to 4% of quarterly revenue. Nine-month gross margin increased from 63.1% to 63.6%, helped by newer products.
- Research and development expense rose 17.4% for the nine-month period to $42.0 million; selling, general and administrative expense rose 28.5% to $21.0 million. Stock-based compensation was $10.1 million, versus $5.7 million.
- Management said third-quarter revenue is typically seasonally highest, driven by camera-market inventory builds ahead of holiday demand. It expects R&D and selling expense to increase in absolute dollars and stated gross margin may decline over time as camera-market exposure grows and new markets are entered.
Outlook, risks, and contingencies
- Management believes operating cash generation and existing cash will meet anticipated requirements for at least 12 months. It expects higher operating and capital expenditures and working-capital needs as the business expands; no specific revenue or earnings guidance is provided in the supplied filing text.
- Customer concentration is significant: Wintech and Chicony together represented approximately 92% of quarterly revenue and 89% of nine-month revenue. The largest ODM customer accounted for 40.8% of quarterly and 29.1% of nine-month revenue. Receivables from Wintech and Chicony totaled approximately $38.6 million.
- Manufacturing is outsourced, primarily to contractors in Asia, without long-term supply agreements. Manufacturing purchase commitments were approximately $26.0 million, compared with $13.7 million at January 31, 2014. The filing also describes exposure to supply disruption, demand forecasting, product obsolescence, competition, pricing, and short product cycles.
- Operating lease payments totaled $13.0 million over the disclosed future schedule. Gross unrecognized tax benefits were approximately $3.1 million; the contractual-obligations table separately lists $1.1 million of uncertain tax liabilities. Management did not anticipate material changes to uncertain tax positions in the next 12 months.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. Available-for-sale securities had insignificant unrealized losses, which management did not consider other-than-temporary.
Important facts for investors to verify
- Whether growth and product demand remain durable, particularly in camera markets, and whether infrastructure demand recovers as H.265 investment resumes.
- Customer and channel concentration, including Wintech’s role, Chicony’s purchasing trends, and the collectability of rising receivables.
- Manufacturing capacity, supplier commitments, and the adequacy of inventory for forecast demand.
- How rising stock-based compensation and planned investment affect future expenses, margins, and dilution.
- Whether cash-flow performance is sustainable after accounting for working-capital timing and marketable-security purchases.