Ambarella, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2019. Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise.
Business context and reporting period
Ambarella develops low-power video and image-processing system-on-chip solutions, including computer-vision technology, for security, consumer-camera, automotive and emerging robotics applications. It sells globally to OEMs and ODMs, with substantial sales through distributor Wintech. Fiscal year ends January 31.
Financial performance and position
| Metric | Three months ended Oct. 31, 2019 | Three months ended Oct. 31, 2018 | Nine months ended Oct. 31, 2019 | Nine months ended Oct. 31, 2018 |
|---|---|---|---|---|
| Revenue | $67.9 | $57.3 | $171.5 | $176.7 |
| Gross profit | $39.1 | $34.6 | $99.4 | $107.5 |
| Gross margin | 57.6% | 60.4% | 57.9% | 60.8% |
| Operating expenses | $46.3 | $44.0 | $135.2 | $133.5 |
| Operating loss | $(7.2) | $(9.4) | $(35.8) | $(26.1) |
| Net loss | $(4.3) | $(9.0) | $(31.8) | $(25.9) |
| Basic and diluted loss per share | $(0.13) | $(0.28) | $(0.97) | $(0.79) |
- Cash and investments: Cash, cash equivalents and marketable debt securities totaled $400.8 million at October 31, 2019, up from $358.9 million at January 31, 2019. Cash and cash equivalents alone were $252.3 million; marketable debt securities were $148.5 million.
- Cash flow, nine months: Operating activities provided $35.3 million, versus $10.5 million in the prior-year period. Investing activities provided $16.4 million, versus using $50.7 million; financing activities provided $6.6 million, versus using $94.2 million. Cash, cash equivalents and restricted cash increased $58.3 million.
- Debt and liquidity: The filing reports no borrowings or financial debt. Total liabilities were $69.2 million, including $10.7 million of operating lease liabilities. Management said existing cash balances should meet anticipated requirements for at least 12 months.
- Other notable metrics: Stock-based compensation was $50.0 million for the nine months. The company reported $27.6 million in manufacturing purchase commitments and $40.5 million in gross unrecognized tax benefits.
Material changes versus the prior comparable period
- Quarterly revenue rose 18.6%, led by professional IP security cameras, action cameras and drones, and automotive cameras. Management attributed China professional-security-camera growth partly to inventory build-up by two major customers.
- Nine-month revenue declined 2.9%, reflecting weakness in non-sports wearable, virtual-reality and drone cameras and automotive markets. Security-camera growth and DJI action-camera launches partially offset lower sales, including reduced sales to GoPro.
- Gross margin fell 2.8 percentage points in the quarter and 2.9 points year to date. Management cited a higher share of lower-margin professional IP security-camera sales, particularly in China.
- Quarterly operating loss narrowed, mainly with higher revenue; nine-month operating loss widened as revenue and gross margin declined and expenses increased. Research and development and selling, general and administrative expenses rose year to date to $95.9 million and $39.3 million, respectively.
- The company adopted lease accounting effective February 1, 2019, recognizing right-of-use assets and lease liabilities. Lease renewals and modifications increased recorded obligations during the period.
Outlook, commentary, risks and contingencies
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects R&D spending to increase as it develops computer-vision products and pursues automotive OEM and robotics markets; it also expects SG&A to increase to support its strategy.
- Management emphasized that growth depends on winning designs and converting them into commercial sales, particularly in professional and home security, automotive and robotics. These markets may involve lengthy development and sales cycles, and design wins do not assure revenue.
- Customer and channel concentration is material: Wintech represented 63.2% of quarterly revenue and 59.2% for the nine months; Chicony represented 15.7% and 17.8%, respectively. A November 2019 unsolicited bid by WPG to acquire up to 30% of Wintech could affect the relationship; the outcome was unknown.
- U.S. export restrictions following the October 2019 addition of Hikvision and Dahua to the BIS Entity List restrict shipments of certain products. Ambarella said it could continue supplying some foreign-produced SoCs in compliance with applicable law, but further restrictions or customer substitution could adversely affect results.
- Risks include customer inventory build-up and order changes, end-market declines and pricing pressure, reliance on third-party manufacturers without long-term supply agreements, capacity constraints, and disruption to the Hong Kong warehouse. The company also highlighted U.S.–China trade tensions and concentration of manufacturing and customers in Asia.
- The company had $50.0 million remaining under its share-repurchase authorization through June 30, 2020; it made no repurchases in the nine-month period. New leases include estimated undiscounted payments of $1.7 million for additional U.S. office space and $2.2 million for a 35-year land lease in Italy, with construction obligations.
- No material legal proceedings were reported. Management said disclosure controls and procedures were effective as of October 31, 2019 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether China customer inventory build-up, including at Hikvision and Dahua, leads to reduced subsequent orders or is affected further by export restrictions.
- Whether revenue growth in professional security, consumer cameras and automotive can offset continuing declines in other camera markets, and whether design wins in automotive and robotics convert to meaningful shipments.
- How product mix, pricing and manufacturing costs affect gross margins, which declined year over year despite quarterly revenue growth.
- Customer concentration and the status of Wintech’s agreement and WPG’s proposed investment; also monitor Chicony receivables and payment trends.
- Cash generation and operating costs, including the effects of stock-based compensation, higher R&D investment, lease commitments and the $27.6 million manufacturing commitment.
- Potential tax exposure: $40.5 million of gross unrecognized tax benefits, open tax years and continuing developments in the Altera case.