Ambarella, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2020 (fiscal 2021 third quarter). Unless otherwise stated, amounts are in U.S. dollars.
Business context
Ambarella develops low-power semiconductor system-on-chips for video, image processing and AI computer vision applications. Its markets include security cameras, automotive, consumer cameras, and industrial and robotics applications. The company sells globally through ODMs, OEMs and distributors.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2020 | Three months ended Oct. 31, 2019 | Nine months ended Oct. 31, 2020 | Nine months ended Oct. 31, 2019 |
|---|---|---|---|---|
| Revenue | $56.1 million | $67.9 million | $160.8 million | $171.5 million |
| Gross profit | $34.8 million | $39.1 million | $97.8 million | $99.4 million |
| Gross margin | 62.0% | 57.6% | 60.8% | 57.9% |
| Operating expenses | $51.0 million | $46.3 million | $144.9 million | $135.2 million |
| Operating loss | $(16.2) million | $(7.2) million | $(47.2) million | $(35.8) million |
| Net loss | $(17.1) million | $(4.3) million | $(47.3) million | $(31.8) million |
| Diluted loss per share | $(0.49) | $(0.13) | $(1.37) | $(0.97) |
- Operating cash flow was $18.3 million for the nine months, down from $35.3 million a year earlier. Cash, cash equivalents and marketable debt securities totaled $423.6 million at October 31, 2020, versus $404.7 million at January 31, 2020.
- Current assets were $476.2 million and current liabilities were $62.2 million, implying strong short-term liquidity. The balance sheet reports no borrowings; lease liabilities totaled $9.5 million.
- Total assets were $549.6 million and shareholders’ equity was $462.7 million. Nine-month stock-based compensation was $51.4 million.
Material changes versus the prior comparable period
- Quarterly revenue declined 17.4%; nine-month revenue declined 6.2%. Management attributed the decreases mainly to lower professional IP security camera and automotive sales. Higher inventory at two major China customers, U.S.-China trade tensions, weaker European demand and an automotive industry slowdown were cited.
- Quarterly gross margin improved 4.4 percentage points and nine-month margin improved 2.9 points, which management attributed primarily to a shift in professional security camera customer mix away from China toward North America and other Asia regions.
- Operating expenses rose 10.3% in the quarter and 7.2% over nine months, led by R&D investment, employee costs and SoC development. Operating losses consequently widened.
- Operating cash flow fell by $17.0 million year over year for the nine-month period, partly reflecting larger net losses and the timing of customer receipts.
- Consumer IP security camera and consumer-market sales, including shipments into newly launched DJI products, partially offset weakness elsewhere. The company also reported sustained demand for some new computer-vision solutions and initial shipments into consumer security and automotive aftermarket applications.
Outlook, risks and notable items
- No quantified revenue or earnings guidance is provided in the filing. Management expects R&D spending to increase as it develops computer-vision products and pursues automotive, robotics and other markets; it also expects SG&A spending to rise to support its strategy.
- Management said existing cash balances should meet anticipated cash requirements for at least the next 12 months. It also noted that operating and capital expenditures may increase and additional capital could be needed if cash proves insufficient.
- COVID-19 had not caused a major supply-chain disruption by the filing date, but the company reported longer manufacturing times and warned of potential development delays, reduced demand, supply interruption and adverse financial effects.
- Manufacturing depends on third parties, with no long-term supply agreements; capacity constraints and substrate shortages could delay production. The company reported $37.1 million of manufacturing purchase commitments.
- Revenue is highly concentrated: Wintech accounted for 62.3% of quarterly revenue and Chicony 17.6%; their shares of nine-month revenue were 60.4% and 17.4%, respectively. Receivables from these customers were $11.2 million and $9.9 million.
- The board extended the share repurchase program through June 30, 2021. Approximately $49.0 million remained available; $1.0 million of shares had been repurchased during the nine months, with none in the quarter.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. It disclosed an ongoing IRS examination of its fiscal 2017 federal return and $27.0 million of gross unrecognized tax benefits after a reported $16.1 million decrease.
Important facts for investors to verify
- Whether revenue weakness among major China customers, in professional security cameras and in automotive persists, and whether consumer growth and new computer-vision shipments can offset it.
- How design wins convert into production and revenue, especially in automotive, industrial and robotics markets with longer development cycles.
- Customer and distributor concentration, including Wintech’s role, customer inventory levels and collection of the reported receivables.
- Whether foundry and assembly capacity, material shortages, COVID-19 effects and Hong Kong logistics create production or delivery constraints.
- The trajectory of operating losses, R&D spending, stock-based compensation and operating cash flow relative to management’s liquidity outlook.
- Potential outcomes of the IRS examination and other tax uncertainties, and the remaining authorization and actual pace of share repurchases.