Ambarella, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2019 (fiscal first quarter of 2020). Unaudited results; comparison is with the three months ended April 30, 2018. Amounts below are in U.S. dollars.
Business context
Ambarella develops low-power video, image-processing and computer-vision semiconductors for camera and other applications. It is investing in computer-vision products aimed at security cameras, automotive systems and robotics as revenue in several legacy camera markets declines.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $47.2 million | $56.9 million |
| Gross profit / margin | $27.9 million / 59% | $34.9 million / 61% |
| Operating expenses | $46.1 million | $44.8 million |
| Operating loss | $18.2 million | $10.0 million |
| Net loss | $17.3 million | $10.0 million |
| Diluted loss per share | $0.53 | $0.30 |
| Cash from operating activities | $5.3 million | $0.1 million |
- Revenue declined 17% year over year. Gross margin fell 2 percentage points; management attributed the decline primarily to a greater revenue mix from lower-margin IP security cameras and weaker sales of higher-margin sports-camera and drone products.
- Research and development expense rose 4% to $33.0 million, primarily supporting computer vision, automotive and robotics development. Selling, general and administrative expense was approximately flat at $13.1 million.
- Other income, net, increased to $2.2 million from $0.8 million, mainly due to higher interest and investment income and a foreign-government R&D subsidy. Income-tax expense was $1.3 million despite a pretax loss; the reported effective tax rate was negative 7.9%.
- Cash, cash equivalents and marketable debt securities totaled $366.2 million at April 30, 2019, versus $358.9 million at January 31, 2019. Current assets were $415.3 million and current liabilities $42.2 million. The filing reports no debt balance.
- Operating cash flow was positive, but management said the increase from the prior-year quarter was primarily due to payment timing with suppliers; it was partly offset by a larger net loss and timing of customer receipts. Stock-based compensation was $16.5 million.
- Total assets were $479.3 million and total liabilities $56.8 million. The company adopted the new lease standard on February 1, 2019; at quarter-end it reported $7.9 million of operating lease right-of-use assets and $8.0 million of lease liabilities.
Material changes and management commentary
- Revenue weakness reflected declines in wearable cameras, virtual reality, drones and automotive video recorders, plus lower demand from two large China professional-security customers. Management linked the latter in part to the U.S. National Defense Authorization Act for Fiscal Year 2019.
- Growth in North American consumer IP security cameras partly offset declines. DJI product launches also partly offset lost sports-camera revenue from GoPro.
- Wintech, the distributor, represented approximately 59% of quarterly revenue; direct ODM customer Chicony represented approximately 18%. Revenue by bill-to location was concentrated in Taiwan ($27.6 million) and Asia Pacific ($14.5 million).
- Management expects R&D spending to increase as it develops new products and computer-vision capabilities, particularly for automotive and robotics. It also expects SG&A to rise to support its strategy. The filing provides no specific quarterly revenue or earnings guidance.
- Management stated existing cash and investments should cover anticipated requirements for at least the next 12 months. It noted spending may rise with headcount, business expansion and IT investment.
Risks, contingencies and unusual items
- Customer and channel concentration, shifting camera-market demand, competition and pricing pressure, uncertain design-win conversion, and dependence on third-party manufacturers are key risks. The company has no long-term agreements with its contract manufacturers.
- Manufacturing purchase commitments were approximately $22.9 million at quarter-end. The company disclosed indemnification obligations but recorded no related liability; it said the maximum potential exposure could not be determined.
- Gross unrecognized tax benefits were approximately $37.9 million; other long-term liabilities included $7.2 million of unrecognized tax benefits, including interest. Management did not anticipate significant changes in uncertain tax positions over the next 12 months.
- No material legal proceedings were reported. Management concluded disclosure controls and procedures were effective at the reasonable-assurance level.
- On May 29, 2019, the board authorized an additional share repurchase program of up to $50 million. No shares had been repurchased under that authorization as of June 7, 2019.
Important facts for investors to verify
- Whether revenue declines in legacy camera markets stabilize and growth in consumer security cameras, automotive and robotics can offset them.
- Whether Wintech and Chicony concentration, and reduced demand from China security customers, change materially.
- Whether gross margin and operating losses improve as product mix, pricing and R&D investment evolve.
- How much positive operating cash flow depends on supplier-payment timing, and whether cash generation remains sustainable.
- Progress toward automotive, robotics and computer-vision design wins, including timing to volume production and associated costs.
- Potential effects of trade restrictions, customer or supplier disruptions, tax examinations and the new share repurchase authorization.