Ambarella, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2018 third quarter and nine months ended October 31, 2017; comparable periods ended October 31, 2016. Ambarella develops video and image-processing semiconductor solutions for OEMs and ODMs. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Three months 2017 | Three months 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $89.1 million | $100.5 million | $224.8 million | $222.8 million |
| Gross margin | 63.6% | 66.0% | 63.3% | 65.8% |
| Operating income | $15.1 million | $29.7 million | $23.0 million | $40.3 million |
| Net income | $11.7 million | $29.0 million | $17.6 million | $39.5 million |
| Diluted EPS | $0.34 | $0.84 | $0.51 | $1.15 |
- Third-quarter revenue fell 11.4% year over year; nine-month revenue rose 0.9%. Third-quarter operating margin was approximately 17.0%, versus 29.5%; net margin was approximately 13.2%, versus 28.9%.
- For the nine months, operating cash flow was $60.3 million, compared with $81.0 million. Investing activities used $13.2 million and financing activities used $49.0 million; cash and cash equivalents decreased by $1.9 million.
- At October 31, cash and cash equivalents were $320.9 million and marketable securities were $93.1 million. Current assets were $486.3 million and current liabilities $60.5 million. The filing reports no borrowings; liabilities include software-license obligations.
- Total assets were $542.6 million, total liabilities $73.5 million and shareholders’ equity $469.1 million. The company reported $414.0 million of cash, cash equivalents and marketable securities.
Material changes and management commentary
- Management attributed the quarterly revenue decline mainly to a major sports-camera customer adopting a competing solution in a mainstream camera model; it expects revenue from that customer to continue declining. Lower drone-market sales also weighed on results.
- Growth in IP security, automotive and non-sports wearable cameras partly offset declines in sports cameras and consumer drones. Management said nine-month revenue was broadly flat as IP security and automotive growth offset declines in sports cameras and consumer drones.
- Gross margin declined as a greater share of sales came from lower-margin IP security cameras and sales from higher-margin sports-camera products fell. Management expects gross margin to face pressure as the company expands in competitive camera markets.
- Research and development expense rose 14.7% for the quarter and 13.3% for the nine months, principally due to engineering headcount, stock compensation and SoC development costs. SG&A also increased, including from stock compensation and professional services.
- The effective tax rate increased to 24.1% for the quarter and 25.9% for the nine months, compared with 2.5% and 2.8%. Management cited a lower share of profits in low-tax jurisdictions and more nondeductible stock compensation, partly offset by R&D credits.
- Management expected fiscal 2018 revenue growth to be slightly down versus fiscal 2017. It expected R&D and SG&A to increase in absolute dollars, including investment in computer vision, automotive and other markets. The company said existing cash and anticipated operating cash generation should cover requirements for at least the next 12 months.
Risks, commitments and unusual items
- Revenue is concentrated: Wintech, the logistics provider, accounted for approximately 51% of quarterly revenue and 62% for the nine months. Wintech, GoPro and Chicony together represented approximately 83% of quarterly revenue. Accounts receivable from those three totaled $39.7 million.
- The company relies on third-party manufacturers, primarily in Asia, and has no long-term agreements with them. Manufacturing purchase commitments were $25.7 million. A production disruption or capacity constraint could affect shipments.
- During the nine months, the company entered noncancelable software-license agreements with aggregate payments of $13.7 million through January 2020. At quarter-end, $10.6 million was recorded as liabilities, with approximately $11.1 million of future minimum payments including imputed interest.
- Stock repurchases used $51.5 million of cash in the nine months. The company had repurchased 1.43 million shares for $71.7 million in total and had approximately $35.0 million available under the program through June 30, 2018.
- Gross unrecognized tax benefits were approximately $43.9 million; recorded unrecognized tax benefits, including interest, were $5.4 million. Tax years remain open to examination across U.S. federal, state and foreign jurisdictions.
- The filing reports no material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How quickly GoPro-related and other sports-camera revenue declines, and whether growth in IP security and automotive products can offset those declines.
- Customer and logistics-provider concentration, including Wintech’s financial condition, receivable collection and contract renewal.
- Whether gross-margin pressure and rising operating expenses persist, and whether computer-vision and automotive investments produce design wins and revenue.
- The outlook underlying management’s expectation of slightly lower fiscal 2018 revenue growth, and the potential effects of seasonality and customer inventory changes.
- The development of tax exposures and obligations under the noncancelable software-license agreements and manufacturing commitments.