Ambarella, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended July 31, 2022; fiscal year ends January 31. Unaudited results are compared with the periods ended July 31, 2021. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Ambarella develops low-power semiconductor system-on-chips for video, image processing, AI and computer vision applications. Its markets include security cameras, automotive, consumer cameras, industrial and robotics. It sells globally to OEMs, ODMs and through distributors. Management is investing in computer-vision products and expansion into automotive and other newer markets.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $80.9 | $79.3 | $171.2 | $149.5 |
| Gross profit | $51.1 | $49.4 | $107.6 | $93.2 |
| Gross margin | 63.1% | 62.3% | 62.9% | 62.3% |
| Operating expenses | $71.3 | $55.4 | $138.3 | $109.3 |
| Operating loss | $(20.2) | $(6.0) | $(30.7) | $(16.1) |
| Net loss | $(23.7) | $(7.2) | $(34.5) | $(18.0) |
| Loss per diluted share | $(0.62) | $(0.20) | $(0.91) | $(0.50) |
- Q2 revenue rose 2.0%; first-half revenue rose 14.5%. Management attributed growth to continued adoption of computer-vision solutions and higher nonrecurring engineering services revenue, partly offset by lower shipments from semiconductor supply constraints and weaker demand from major China customers.
- Gross margin improved 0.8 percentage points in Q2 and 0.6 points for the first half. Management cited product and customer mix, including more computer-vision, automotive and higher-margin engineering revenue. A $1.9 million adverse purchase commitment charge weighed on cost of revenue.
- Q2 operating expenses increased 28.7% year over year; R&D rose 32.3% and selling, general and administrative expense rose 19.5%. Management cited headcount and compensation growth, engineering costs, chip tape-outs and support for automotive, robotics and industrial applications.
- Stock-based compensation was $26.9 million in Q2 and $54.0 million for the first half, versus $19.4 million and $38.2 million, respectively, a significant component of reported expenses.
Cash, liquidity and obligations
- Cash and cash equivalents were $194.9 million at July 31, 2022, versus $171.0 million at January 31, 2022. Including $3.0 million of marketable debt securities, cash and marketable securities totaled approximately $197.9 million.
- Operating cash flow was $33.0 million for the first half, compared with $9.9 million a year earlier. Cash increased by $23.9 million over the period. Investing cash use was $10.3 million; financing cash inflow was $1.2 million.
- Current assets were $282.9 million and current liabilities $77.5 million; working capital was approximately $205.3 million. The filing reports no conventional borrowings. Operating lease liabilities totaled $10.5 million; software-license obligations are also recorded in liabilities.
- Manufacturing purchase commitments were $68.3 million at quarter-end, with a $1.9 million loss liability recorded for adverse commitments. Management said existing cash should meet anticipated requirements for at least the next 12 months, while expecting operating and capital expenditures to rise.
- The company extended its share repurchase program through June 30, 2023. No shares were repurchased in the first half; approximately $49.0 million remained authorized at July 31, 2022.
Changes, outlook and risks
- Compared with the prior-year quarter, revenue growth was modest while operating and net losses widened substantially, primarily because expenses rose faster than gross profit. First-half revenue and operating cash flow increased year over year, but losses also widened.
- No specific revenue or earnings guidance is provided in the filing text. Management expects R&D and SG&A spending to increase as it develops products and pursues new markets. It notes that revenue can be seasonal, historically tending to be higher in the third fiscal quarter, but warns that pandemic effects and supply constraints may disrupt normal patterns.
- Management cited COVID-19 disruptions, longer manufacturing lead times, component shortages, inflation and customers’ possible inventory reductions as sources of demand and shipment volatility. The company depends on third-party manufacturers, has no long-term agreements with them, and single-sources each SoC at a manufacturing location.
- Customer concentration is significant: WT Microelectronics accounted for 59.4% of Q2 revenue and Chicony for 12.9%; first-half shares were 57.9% and 12.1%. The company also disclosed concentration of receivables with these customers.
- Other material risks include U.S.-China trade and export restrictions, geopolitical exposure in Taiwan and Asia, competition and execution risks in new markets, design wins that may not convert to sales, and customer order cancellations or delays. The company is subject to an IRS examination of its fiscal 2017 federal return; gross unrecognized tax benefits were approximately $31.3 million. Management reported no material legal proceedings and effective disclosure controls as of July 31, 2022.
Important facts for investors to verify
- Whether computer-vision and automotive growth can offset customer inventory reductions, China weakness and supply-chain constraints.
- How revenue and accounts receivable evolve for WT and Chicony, and whether customer concentration declines.
- Whether operating expenses, particularly R&D and stock-based compensation, can be supported by growth in gross profit and eventual profitability.
- Whether the $68.3 million manufacturing commitment and supply constraints lead to additional charges, excess inventory or shipment shortfalls.
- Whether cash generation remains sufficient as investment spending rises, and how management uses the remaining share-repurchase authorization.
- Developments in the IRS examination and other tax uncertainties, and any changes in export restrictions or geopolitical conditions affecting Asian operations and customers.