Ambarella, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2018. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Ambarella develops video, image-processing and computer-vision semiconductor solutions.
Financial performance
| Metric | Three months ended Oct. 31, 2018 | Prior-year quarter | Nine months ended Oct. 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $57.3 | $89.1 | $176.7 | $224.8 |
| Gross profit / margin | $34.6 / 60.4% | $56.6 / 63.6% | $107.5 / 60.8% | $142.4 / 63.3% |
| Operating income (loss) | $(9.4) | $15.1 | $(26.1) | $23.0 |
| Net income (loss) | $(9.0) | $11.7 | $(25.9) | $17.6 |
| Net income (loss) per diluted share | $(0.28) | $0.34 | $(0.79) | $0.51 |
- Quarterly revenue fell 35.7%; nine-month revenue fell 21.4% year over year. Gross margins declined 3.2 and 2.5 percentage points, respectively.
- Operating expenses increased to $44.0 million in the quarter and $133.5 million for nine months. R&D was $31.7 million and $95.4 million, respectively; management attributed increases chiefly to engineering hiring, chip development and computer-vision work.
- Operating cash flow was $10.5 million for nine months, compared with $60.3 million a year earlier. Investing used $50.7 million and financing used $94.2 million; cash, cash equivalents and restricted cash declined $134.3 million.
- At October 31, cash and cash equivalents were $212.3 million and marketable securities were $136.3 million, totaling $348.6 million. Current assets were $407.7 million and current liabilities $37.9 million. Total liabilities were $47.5 million; the filing reports no borrowings or other debt balance.
- Cash and marketable securities were $86.0 million lower than at January 31, principally reflecting share repurchases and investment activity. Nine-month repurchases used $96.4 million for 2.38 million shares. About $35.4 million remained authorized at October 31.
Drivers, comparisons and accounting
- Management attributed revenue weakness primarily to declines in wearable cameras—including sports, virtual-reality and other wearable products—and drones. DJI shifted consumer drones to competing solutions; smaller drone customers also remained weak.
- Growth in automotive cameras, particularly OEM video recorders in Japan and China, and consumer IP-security cameras partly offset those declines. Automotive aftermarket revenue was lower; professional IP-security revenue was slightly down.
- The mix shift toward lower-margin IP-security products and away from higher-margin drones contributed to gross-margin compression. Revenue remains concentrated: Wintech accounted for approximately 49% of quarterly and 57% of nine-month revenue; Chicony accounted for approximately 23% and 16%, respectively.
- ASC 606 was adopted February 1, 2018. Distributor sales are now generally recognized on shipment to distributors (“sell-in”), rather than when distributors sell to end customers (“sell-through”). The change increased reported quarterly revenue by $0.7 million versus ASC 605, but reduced reported nine-month revenue by $7.6 million versus ASC 605. Prior-year figures were not restated, so comparisons are affected by differing revenue-recognition methods.
Outlook, risks and other notable items
- No numerical forward guidance is provided in the filing. Management expected weakness in wearable-camera and drone demand to continue through at least fiscal 2019, while investing in automotive OEM, IP-security and robotics applications. It expected R&D and SG&A to increase in absolute dollars and said existing cash should cover anticipated requirements for at least 12 months.
- Key risks include dependence on a small group of customers and on Wintech, competing solutions at GoPro and DJI, uncertain customer forecasts and product launches, and reliance on third-party manufacturers without long-term supply agreements. Management also cited potential effects from U.S.-China trade restrictions and legislation affecting two large China IP-security customers.
- The company reported $21.8 million of manufacturing purchase commitments. Gross unrecognized tax benefits were approximately $36.2 million; tax audits and the realization of tax assets remain areas of uncertainty. No material legal proceedings were reported.
- Management stated that disclosure controls and procedures were effective at the reasonable-assurance level as of October 31, 2018, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check subsequent revenue, margins and cash generation against the reported declines and management’s expectation that consumer-camera and drone weakness would persist.
- Assess customer and channel exposure, especially Wintech, Chicony, GoPro and DJI, and the durability of growth in automotive and consumer IP security.
- Reconcile revenue trends under ASC 606 with distributor sell-through, inventory and variable consideration; distinguish accounting timing effects from underlying demand.
- Track the use of cash for repurchases, remaining authorization, and operating cash flow relative to continued R&D investment.
- Review developments in China-related trade restrictions, manufacturing capacity and supply continuity, and uncertain tax positions.