Ambarella, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 31, 2014; comparisons are to the corresponding 2013 periods. Ambarella develops video and image-processing semiconductor solutions, primarily for camera and infrastructure applications. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Three months ended July 31, 2014 | Three months ended July 31, 2013 | Six months ended July 31, 2014 | Six months ended July 31, 2013 |
|---|---|---|---|---|
| Revenue | $46.97 | $37.71 | $87.89 | $71.65 |
| Gross profit / gross margin | $30.54 / 65% | $23.29 / 62% | $56.13 / 64% | $44.98 / 63% |
| Operating income | $10.16 | $6.93 | $16.09 | $12.15 |
| Net income | $9.31 | $6.25 | $14.57 | $11.00 |
| Diluted earnings per share | $0.29 | $0.21 | $0.46 | $0.37 |
- Quarterly revenue increased 25% year over year and six-month revenue increased 23%. Operating income rose 47% and 32%, respectively; net income rose approximately 49% and 33%.
- For the six months, operating cash flow was $18.85 million, versus $15.94 million in 2013. Investing activities used $39.48 million, largely reflecting $41.62 million of investment purchases, partly offset by maturities. Financing provided $5.50 million. Cash and cash equivalents declined $15.13 million to $128.26 million.
- At July 31, cash and cash equivalents were $128.26 million and marketable securities were $38.27 million. Current assets were $210.19 million and current liabilities $32.36 million. The filing reports no borrowings or other interest-bearing debt on the balance sheet.
- Accounts receivable was $26.83 million, up from $18.84 million at January 31; inventory was $13.00 million, up from $10.45 million. These working-capital increases contributed to cash-flow needs.
Material changes and management commentary
- Management attributed growth mainly to demand for IP security products, including A5S and S2 chips, and shipments of the A9 chip into wearable sports camera and UAV markets. Declines in automotive cameras and infrastructure partially offset growth; management cited competitive pressure in China and weak conditions in Russia for automotive, and delayed investment amid weak U.S. and European infrastructure markets.
- Gross margin improved year over year, which management attributed primarily to higher-margin S2 and A9 shipments. Cost of revenue grew more slowly than revenue.
- Research and development expense increased 23% in the quarter and 18% for six months, reflecting engineering personnel, product development, stock compensation, and facility costs. Selling, general and administrative expense rose 28% and 29%, respectively, mainly due to increased headcount and stock compensation. Total stock-based compensation was $5.82 million for six months, versus $3.20 million.
- The company invested in available-for-sale debt securities; their fair value was approximately $39.8 million, with $21,000 of net unrealized losses. Management did not consider the losses other-than-temporary.
- Management said cash from operations and existing cash were expected to meet anticipated requirements for at least the next 12 months. It expects operating and capital expenditures to increase as staffing, business activity, IT systems, and public-company compliance needs expand. No specific revenue or earnings guidance was provided in the filing.
Risks, commitments, and other notable items
- Revenue concentration is significant: Wintech and Chicony together represented approximately 88% of quarterly revenue and 87% of six-month revenue. Wintech alone accounted for approximately 65% and 67%, respectively. The company also disclosed that its five largest customers represented 63% of quarterly revenue.
- The company relies on third-party manufacturers, assemblers, and testers, primarily in Asia, and has no long-term agreements with its manufacturing contractors. Manufacturing purchase commitments were $18.4 million at July 31, up from $13.7 million at January 31.
- Management identified risks from customer concentration, order cancellations and forecasting, seasonality, competition and pricing pressure, product adoption and design-win timing, supply capacity, product defects, and reliance on key technology and logistics providers. The company noted that third-quarter revenue is normally its highest due to seasonal camera-market demand.
- Gross unrecognized tax benefits were approximately $3.6 million; the company did not anticipate material changes in uncertain tax positions over the next 12 months. The filing also lists $1.49 million of uncertain tax liabilities in its contractual-obligations table; timing of payment is unclear.
- Operating lease commitments totaled $14.0 million in future minimum payments, and total contractual obligations were $33.9 million. A related-party software license commitment with Cadence totaled $6.9 million, payable through January 2017.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at the reasonable-assurance level; the new ERP system was completed during the period.
Important facts for investors to verify
- Whether IP security, wearable-camera, and UAV demand continues to offset weakness in automotive and infrastructure markets.
- How much revenue and receivables remain dependent on Wintech, Chicony, and a small group of customers, and whether customer concentration changes.
- Whether improved gross margins persist as product mix, selling prices, and competitive pressures evolve.
- Whether receivables, inventory, supplier commitments, and cash conversion remain manageable as sales grow.
- Whether third-party manufacturing capacity and the company’s tax exposures or contractual commitments change materially.
- Whether increased research, hiring, and public-company costs are matched by sustainable revenue and operating cash flow.