Ambarella, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended October 31, 2015; comparisons are with the corresponding periods ended October 31, 2014. Amounts are in U.S. dollars unless otherwise stated.
Business context and reporting period
Ambarella develops video and image-processing semiconductor solutions and sells SoCs to OEMs and ODMs. Growth was driven mainly by camera applications, including wearable sports, IP security, UAV and automotive aftermarket cameras. The quarter is typically seasonally strong ahead of holiday demand.
Key financial metrics
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $93.2m | $65.7m | $248.4m | $153.6m |
| Gross profit / margin | $61.3m / 65.7% | $41.6m / 63.3% | $162.0m / 65.2% | $97.7m / 63.6% |
| Operating income | $30.3m | $18.7m | $75.6m | $34.7m |
| Net income | $29.5m | $18.3m | $71.4m | $32.9m |
| Diluted EPS | $0.87 | $0.57 | $2.12 | $1.03 |
| Operating cash flow | Not presented by quarter | $93.2m | $35.8m |
Revenue increased 41.9% for the quarter and 61.7% for the nine-month period. Operating margins were approximately 32.5% and 30.4%, respectively, versus approximately 28.4% and 22.6% in the prior-year periods. Research and development expense rose to $22.1m for the quarter and $59.5m year to date; nine-month stock-based compensation was $19.5m, compared with $10.1m.
At October 31, 2015, cash and cash equivalents were $236.5m and marketable securities were $40.3m, totaling $276.7m. Current assets were $351.4m and current liabilities $49.5m. No borrowings are reported on the presented balance sheet. Nine-month investing cash outflow was $34.3m, including $30.0m for the VisLab acquisition; financing cash inflow was $7.2m.
Material changes versus the prior comparable period
- Higher demand for A9, A7L, S2L and A12 products drove revenue growth, especially in camera markets. China-region softness in the quarter and lower infrastructure-market revenue partly offset growth.
- Gross margin improved 2.4 percentage points in the quarter and 1.6 points year to date, reflecting mix toward higher-margin products and supplier cost reductions. Management expected margin to decline over the following 12 months as lower-margin camera markets grew and infrastructure continued to weaken.
- Operating expenses increased, particularly R&D, due to higher engineering headcount, product development and stock-based compensation.
- Ambarella acquired VisLab on June 25, 2015 for $30.0m cash, recording $25.3m of goodwill and $4.1m of intangible assets. VisLab develops computer-vision and intelligent-control systems, including autonomous-driving technology.
- Cash and marketable securities increased from $208.0m at January 31, 2015 to $276.7m. Total liabilities were $58.9m, compared with $47.1m at fiscal year-end; other long-term liabilities increased to $9.4m.
Outlook, risks, contingencies and unusual items
- Management said elevated wearable-sports-camera customer inventory at the end of September could significantly reduce revenue in the quarter ending January 31, 2016 and possibly the quarter ending April 30, 2016. No numerical revenue guidance is provided in the filing text.
- Management believed operating cash generation and existing cash would cover anticipated requirements for at least 12 months. It expected operating and capital expenditures to rise with headcount, business expansion and IT investment.
- Customer concentration is substantial: Wintech and Chicony together accounted for about 89% of quarterly revenue and 90% of nine-month revenue. Wintech alone represented approximately 68% of revenue in both periods. The two customers accounted for $42.9m of receivables at quarter-end.
- Manufacturing depends on third-party contractors, primarily in Asia, without long-term supply agreements. Manufacturing purchase commitments were $23.4m. Operating-lease minimum payments totaled $12.8m.
- Gross unrecognized tax benefits were approximately $24.1m; tax examinations and uncertainty around tax positions could affect future results. The company did not anticipate changes in uncertain tax positions in the next 12 months.
- There were no material legal proceedings reported, and no liabilities were recorded for the described indemnification obligations. Management judged disclosure controls effective as of October 31, 2015; no material change in internal control was reported.
Important facts for investors to verify
- Whether elevated wearable-camera inventory affected revenue in the subsequent quarters as management anticipated.
- How much revenue and receivables remain concentrated in Wintech, Chicony and a small number of end markets.
- Whether product mix, China IP-security growth and infrastructure weakness drive the expected gross-margin decline.
- How VisLab’s technology, integration costs and acquired goodwill develop, including any impairment indicators.
- The outcome and timing of tax examinations and uncertain tax positions, and the effect of higher stock-based compensation on reported earnings and dilution.