Ambarella, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended April 30, 2015; comparisons are with the three months ended April 30, 2014. Amounts below are in U.S. dollars unless stated otherwise. Ambarella develops video-processing semiconductor solutions sold to OEMs and ODMs.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $71.0 million | $40.9 million | +73.5% |
| Gross profit / margin | $45.9 million / 64.7% | $25.6 million / 62.5% | Margin +2.2 points |
| Operating income / margin | $20.3 million / 28.6% | $5.9 million / 14.5% | Operating income +$14.4 million |
| Net income | $18.9 million | $5.3 million | +258.4% |
| Diluted EPS | $0.56 | $0.17 | — |
| Operating cash flow | $24.8 million | $10.3 million | +$14.5 million |
- Cash and cash equivalents were $197.3 million, with $37.9 million of marketable securities, for total cash and securities of approximately $235.2 million at April 30, 2015, versus $208.0 million at January 31, 2015.
- Total liabilities were $48.5 million, principally current liabilities; the balance sheet reports no borrowings or debt. Current assets were $305.0 million and current liabilities $46.9 million.
- Cash increased $27.0 million during the quarter. Investing activities used $0.8 million and financing activities provided $3.1 million.
- Inventory rose to $25.8 million from $21.7 million. Manufacturing purchase commitments were $38.1 million.
Material changes and management commentary
- Management attributed revenue growth mainly to strong demand for A9 and A7L chips in wearable sports, IP security and automotive aftermarket cameras, reflecting broader adoption by existing customers and new customer additions. Weak infrastructure demand, particularly amid delays in H.265 network upgrades, partly offset growth.
- Gross margin improved with a higher share of A7L and A9 camera shipments and supplier cost reductions. Infrastructure revenue fell to 4.1% of revenue from 10.4%; management noted infrastructure products generally carry higher margins.
- R&D expense rose 28.4% to $16.6 million, partly due to engineering headcount growth, chip-development costs and stock compensation. SG&A rose 33.4% to $9.0 million, including higher compensation and public-company costs.
- Stock-based compensation increased to $5.5 million from $2.9 million and reduced reported earnings relative to cash generation.
- Hong Kong accounted for $65.7 million, or approximately 92.5%, of reported revenue. Wintech and Chicony together represented approximately 91% of revenue; the five largest customers represented approximately 62%.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management said existing cash and anticipated operating cash generation should cover expected requirements for at least the next 12 months. It expects operating and capital expenditures to increase, including as headcount, product development and public-company requirements grow.
- Management cautioned that gross margin may decline over time as the company expands in the competitive camera market. Revenue is seasonal, with the third fiscal quarter typically strongest; results may fluctuate with product mix, customer orders and end-market demand.
- Key risks include reliance on a limited number of customers and Wintech, dependence on third-party manufacturers without long-term supply agreements, inventory and demand-forecasting risk, competition and pricing pressure, and concentration in camera end markets. A disruption at contract manufacturers could affect production.
- The company had $38.1 million of manufacturing purchase commitments and $10.8 million of future minimum operating-lease payments. It also disclosed a $7.5 million related-party software-license commitment to Cadence payable through January 2017. Gross unrecognized tax benefits were approximately $4.7 million; tax years remain open to examination.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management assessed disclosure controls as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether strong demand for A9/A7L camera applications persists and offsets continued weakness in infrastructure markets.
- Customer and channel concentration: Wintech and Chicony together generated approximately 91% of quarterly revenue, and Wintech alone processed approximately 64% of revenue.
- Inventory growth and the $38.1 million of manufacturing commitments relative to customer demand and order flexibility.
- Sustainability of the quarter’s 64.7% gross margin given product mix, pricing pressure and management’s warning of possible future margin declines.
- Potential earnings dilution and expense from stock-based compensation, alongside the company’s sizable unrecognized compensation costs.