Ambarella, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2019 (fiscal 2020 Q2). Unaudited results; financial amounts below are in millions of U.S. dollars unless noted. Ambarella develops video and image-processing semiconductors and computer-vision solutions.
Financial performance and liquidity
| Metric | Three months ended July 31, 2019 | Six months ended July 31, 2019 |
|---|---|---|
| Revenue | $56.4 | $103.6 |
| Gross profit / gross margin | $32.4 / 57.5% | $60.3 / 58.2% |
| Operating loss | $(10.4) | $(28.6) |
| Net loss / diluted loss per share | $(10.2) / $(0.31) | $(27.5) / $(0.84) |
- Year-over-year, quarterly revenue fell 9.7% and six-month revenue fell 13.2%. Gross margin declined from 60.8% to 57.5% for the quarter and from 61.1% to 58.2% for the half year.
- Six-month operating cash flow was $13.4, compared with $7.0 a year earlier. Cash, cash equivalents and restricted cash increased $28.6 to $222.7. Cash, cash equivalents and marketable debt securities totaled $375.8 at July 31, versus $358.9 at January 31.
- Current assets were $425.6 and current liabilities $47.2. The filing reports no borrowing debt; liabilities include $7.4 of operating lease liabilities and other obligations.
- Total assets were $490.2 and shareholders’ equity $428.5. Stock-based compensation was $32.7 for the six months, compared with $29.3 in the prior-year period.
Material changes and business drivers
- Declines in sports, wearable, virtual-reality and drone cameras, and automotive video recorders, drove revenue lower. Management cited a slowdown in automotive markets and a prior-year customer promotion that did not recur.
- Growth in consumer IP security, particularly North American home security, and professional IP security in China and Europe partly offset declines. Initial ramps of computer-vision security solutions contributed to second-quarter professional IP security growth. DJI product launches partly offset reduced GoPro-related sales.
- Wintech, the distributor, represented approximately 54.9% of quarterly revenue and 56.5% of six-month revenue; direct ODM customer Chicony represented 20.5% and 19.1%, respectively. Taiwan accounted for $31.0 of quarterly revenue and $58.6 for the six months.
- Operating losses widened despite lower reported operating expenses for the quarter: lower revenue and gross margin weighed on results. Management said R&D spending was supported by approximately $3.2 of foreign-government grants in the quarter; engineering headcount was 559, versus 547 a year earlier.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects R&D and selling, general and administrative expenses to increase as it develops computer-vision products and addresses automotive OEM and robotics markets. It expects gross margin to face pressure, particularly as sales shift toward lower-margin IP security products.
- Management believes existing cash balances are sufficient for anticipated requirements through at least the next 12 months. It also expects operating and capital expenditures to rise as headcount, business activity and IT investment increase.
- Key risks include reliance on a small number of customers and Wintech; uncertain conversion of design wins into sales; declining legacy camera markets; competition and pricing pressure; reliance on third-party manufacturing without long-term supply agreements; and trade restrictions, tariffs and geopolitical disruption. The company noted that Hong Kong unrest could affect its primary finished-product warehouse, though it had not been materially affected as of the filing.
- Manufacturing purchase commitments were $41.3 at July 31, up from $28.2 at January 31. In August 2019, the company entered into additional office lease arrangements with estimated undiscounted payments of $9.4 for Santa Clara, $1.5 for Shanghai and $2.4 for a 35-year Parma facility obligation.
- The company adopted lease accounting standard ASC 842 on February 1, 2019, recognizing right-of-use assets and lease liabilities. Income-tax expense rose partly because of nondeductible stock compensation and losses in jurisdictions where related tax benefits could not be recognized. The filing reports $38.7 of gross unrecognized tax benefits and discusses a pending Altera tax case development.
- The board authorized up to $50.0 of share repurchases through June 30, 2020; none had been made in the quarter or six-month period. Management reported effective disclosure controls and no material legal proceedings.
Important facts for investors to verify
- Whether security-camera and computer-vision growth can offset continued declines in consumer-camera and automotive recorder markets.
- Customer and distributor concentration, including Wintech’s role and the exposure to Chicony, and the collectability of their receivables.
- Whether gross-margin pressure, tariffs and supply-chain costs persist, and whether R&D grants recur.
- Progress and timing of design wins and production ramps in automotive OEM and robotics applications, including the VisLab-related technology.
- Future cash generation and spending, the $41.3 manufacturing commitments, new lease obligations, and any actual share repurchases.
- Developments in tax examinations and uncertain tax positions, trade restrictions, and potential disruption to Hong Kong logistics or third-party manufacturing.