Ambarella, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2018; this was the second quarter of fiscal 2019. Amounts are in U.S. dollars.
Business context and financial performance
Ambarella develops low-power video, image-processing and computer-vision system-on-chip products for camera and related markets. Its principal markets include IP security, wearable, drone and automotive cameras. The company relies on external manufacturers and sells a substantial share of revenue through distributor Wintech.
| Metric | Three months ended July 31, 2018 | Six months ended July 31, 2018 |
|---|---|---|
| Revenue | $62.5 million, down 12.8% year over year | $119.4 million, down 12.0% |
| Gross profit / margin | $38.0 million / 60.8%, versus 62.6% | $72.9 million / 61.1%, versus 63.2% |
| Operating income (loss) | $(6.7) million, versus $5.3 million income | $(16.6) million, versus $7.9 million income |
| Net income (loss) | $(6.9) million; $(0.21) per diluted share | $(16.9) million; $(0.51) per diluted share |
| Operating cash flow | Not presented separately for the quarter | $7.0 million, versus $33.7 million |
For the six months, research and development expense rose 17.8% to $63.8 million and selling, general and administrative expense rose 8.6% to $25.7 million. Stock-based compensation was $29.3 million, a substantial noncash expense. The filing reports no borrowings or debt balance; total liabilities were $57.8 million at July 31.
Liquidity, cash flow and capital allocation
Cash, cash equivalents and marketable securities totaled approximately $376.0 million at July 31, down from $434.6 million at January 31. Current assets were $438.4 million and current liabilities were $47.6 million. Management said existing cash balances should cover anticipated requirements for at least the next 12 months.
Six-month investing cash flow was positive $5.3 million, reflecting net investment-security transactions; financing cash flow was negative $63.6 million, primarily from $65.6 million of share repurchases. The company had $66.1 million remaining under its repurchase authorization at July 31. After quarter-end, it repurchased a further 598,892 shares for approximately $23.1 million through September 6, leaving approximately $43.0 million available.
Material changes and accounting comparability
- Management attributed lower revenue mainly to declines in wearable-camera markets and consumer drones, including a major drone customer shifting to competing products. Growth in IP security and automotive cameras partly offset those declines.
- Gross margin declined as a larger portion of sales came from lower-margin IP security cameras and revenue fell in higher-margin UAV cameras.
- Operating losses reflected lower revenue and increased investment in computer vision and automotive OEM opportunities, including higher engineering headcount, stock compensation and chip-development costs.
- Ambarella adopted ASC 606 on February 1, 2018. Distributor revenue is now generally recognized on shipment and transfer of control (“sell-in”), rather than when distributors sell to end customers (“sell-through”); prior-year figures were not restated. For Q2, reported revenue was $62.5 million, while the filing shows $59.1 million under the former ASC 605 basis. For the six months, the corresponding ASC 605 amount was $111.1 million, versus $119.4 million reported under ASC 606. This change complicates year-over-year comparisons.
Outlook, risks and contingencies
- The filing gives no specific numeric revenue or earnings guidance. Management expects weakness in wearable and drone markets to continue through the second half of fiscal 2019, while investing in computer vision, automotive OEM and robotics opportunities. It expects R&D and SG&A spending to increase and says gross margin may decline as the company penetrates competitive camera markets.
- Revenue and credit exposure are concentrated: Wintech accounted for approximately 63% of Q2 revenue and 61% for the six-month period; Chicony accounted for 15% and 13%, respectively. Wintech and Chicony receivables were approximately $14.7 million and $9.5 million at July 31.
- Manufacturing depends on third-party contractors, primarily in Asia, without long-term supply agreements. Manufacturing purchase commitments were approximately $22.1 million. The filing also cites demand-forecasting, customer-concentration, competition, product-transition and supply-capacity risks.
- Gross unrecognized tax benefits were approximately $35.8 million; management did not anticipate significant changes to uncertain tax positions in the next 12 months. The company disclosed operating lease payments of $6.6 million and reported no material legal proceedings or off-balance-sheet arrangements.
- Management stated disclosure controls were effective as of July 31, 2018, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported revenue trend reflects ASC 606 sell-in timing versus underlying end-customer demand, and whether distributor inventories are building or normalizing.
- Whether growth in IP security and automotive cameras can offset continued weakness in wearable and drone markets, including the expected impact of customer shifts to competitors.
- Whether R&D and other spending can be supported by revenue and operating cash flow while margins are under pressure.
- Wintech and Chicony customer exposure, receivable collection, and the continuity of the distributor relationship.
- Cash remaining after buybacks, execution of the repurchase authorization, and the reported share count; the filing gives 32.65 million shares outstanding at July 31 and 32.06 million at August 31.
- Potential tax exposure, including the $35.8 million of gross unrecognized tax benefits, and progress in resolving provisional accounting for U.S. tax reform.