Ambarella, Inc. — FY2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended January 31, 2018. Ambarella develops fabless semiconductor system-on-chip solutions for video, image processing and computer vision, primarily for camera applications. The company reported that 98% of revenue came from camera markets and 2% from video infrastructure.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $295.4 million | $310.3 million |
| Gross profit / margin | $187.7 million / 63.6% | $205.0 million / 66.1% |
| Operating income / margin | $24.4 million / 8.3% | $60.4 million / 19.5% |
| Net income / diluted EPS | $18.9 million / $0.55 | $57.8 million / $1.68 |
| Cash from operating activities | $85.4 million | $113.3 million |
| Cash, cash equivalents and marketable securities | $434.6 million | $405.4 million |
| Working capital | $440.0 million | $414.1 million |
| Total liabilities | $64.5 million | $57.6 million |
Revenue declined 4.8% year over year, while operating income fell 59.5% and net income fell 67.4%. Research and development expense rose 14.1% to $115.5 million; selling, general and administrative expense rose 10.0% to $47.8 million. The effective tax rate was 27%, compared with 5% in FY2017. The filing reports no material borrowing debt; total liabilities primarily comprise operating and other obligations. Management said existing cash and anticipated operating cash generation should meet expected cash needs for at least 12 months.
Material changes versus the prior comparable period
- GoPro revenue fell 50.3%, from $74.9 million to $37.2 million, after GoPro used a competing solution in a mainstream camera. GoPro represented 12% of FY2018 revenue, versus 19% in FY2017. Management expects GoPro revenue to decline further.
- Revenue also weakened in drones, including from DJI product mix shifting to non-Ambarella products. Growth in IP security, automotive and non-sports wearable cameras partly offset these declines.
- Gross margin fell 2.5 percentage points, reflecting a greater share of lower-margin IP security revenue and lower revenue from higher-margin sports cameras and drones. FY2017 gross margin had benefited by about $2.9 million from recovery and sale of previously written-down inventory.
- Operating cash flow decreased $27.9 million. Cash flow was also affected by payment timing with suppliers and lower deferred revenue, partly offset by customer collections.
- Wintech, the distributor, accounted for 59% of revenue; the five largest ODM/OEM customers together represented 51%. Sales through Wintech were 59%, 60% and 67% of revenue in FY2018, FY2017 and FY2016, respectively.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided in the filing. Management expects R&D spending to increase and anticipates gross-margin pressure over the next 12 months as security-camera revenue grows and sports-camera and drone revenue declines.
- Growth plans emphasize computer vision and new markets, including OEM automotive ADAS, autonomous vehicles and robotics. The CV1 and CV22 computer-vision SoCs were announced in January 2018; commercial adoption and resulting revenue are uncertain.
- Key risks include reliance on a small number of customers and on Wintech; cancellable purchase orders and difficult demand forecasting; competition and pricing pressure; short camera product cycles; and dependence on third-party foundry, assembly and test capacity, with no long-term supply contracts.
- The Tax Cuts and Jobs Act produced a provisional tax accounting impact, including a $1.9 million reduction in deferred tax assets and a $2.3 million increase in deferred tax expense. The company said it continued to assess the legislation’s effects.
- FY2018 included $56.9 million of stock-based compensation. The company repurchased 1.09 million shares for $54.8 million during the year; $31.7 million remained available under the repurchase authorization at year-end. No cash dividends are planned for the foreseeable future.
- The filing reports no material legal proceedings. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether new customer wins and computer-vision products generate commercial revenue sufficient to offset continuing GoPro and drone declines.
- Whether IP security and automotive growth can sustain revenue and margins amid the company’s stated gross-margin pressure.
- Customer and distributor exposure, particularly Wintech’s 59% revenue share and the terms and renewal status of its agreement.
- Cash-flow trends, inventory levels, purchase commitments and the company’s capacity to manage demand shifts and supply constraints.
- Final tax effects of the Tax Act, including the company’s substantial unrecognized tax benefits and deferred tax asset valuation allowance.
- Potential dilution from equity compensation: the filing reports 3.7 million outstanding options and unvested restricted shares/units, and continuing equity-plan share reserves.