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Ambarella (AMBA) Q3 Earnings & Revenues Beat, Down Y/Y

Zacks

Continuing its earnings streak alive for the 10th time in a row, Ambarella Inc. AMBA reported better-than-expected results for third-quarter fiscal 2018. In fact, the company beat its projections at every point — revenues and margins.

However, on a year-over-year basis, its top- and bottom-line results registered declines mainly due to substantial plunge in chip sales to GoPro Inc. GPRO, softness in the drone market as well as elevated operating expenses.

Let’s discuss the quarterly results in detail.

Quarter in Detail


The company’s fiscal third-quarter revenues decreased 11.4% year over year to $89.1 million, mainly due to decline in drone and GoPro sports cameras revenues, partially offset by strong performances in the IP security, auto and non-GoPro wearable markets.

However, quarterly revenues surpassed the Zacks Consensus Estimate of $89 million and came toward the higher-end of management’s guidance range of $87.5-$90.5 million. Moreover, excluding sales to GoPro, revenues were up 7.2% to $70.6 million. Sales to GoPro significantly declined year over year from $34.6 million to $18.4 million. During the fiscal third quarter, GoPro’s contribution to total revenues was down to 20.7% from 30% in the year-ago quarter.

Apart from GoPro, WT Microelectronics and Chicony were the two companies which have contributed more than 10% to Ambarella’s fiscal third-quarter total revenues. WT Microelctronics’ contribution totaled50.6%, while Chicony contributed 11.9%.

On a non-GAAP basis, the company reported gross margin of 64%, which came in 230 basis points (bps) lower than the year-ago quarter. However, the figure came in 100 bps higher than the previous quarter, mainly driven by better IP security product mix and increase in sports camera revenues. Also, the fiscal third-quarter non-GAAP gross margin was higher than management’s earlier guidance of 62-63.5%.

Non-GAAP operating expenses came in at $27.2 million, up from $24.2 million incurred in the year-ago quarter and $25.4 million in third-quarter fiscal 2017. Operating expenses flared up primarily due to escalating chip-development costs which more than offsets the benefit from a decline in the provision for annual executive bonuses. However, non-GAAP operating expenses came below the company’s previously guided range of $28-$29.5 million.

Non-GAAP operating income dipped to $29.8 million from $42.4 million reported in the year-ago quarter. Operating margin contracted 880 bps to 33.4% in the reported quarter chiefly due to reduced gross margin and soaring operating expenses.

Non-GAAP net income plunged to $25.7 million from $38.4 million reported in the year-earlier quarter. On per share basis, the company’s earnings came in at 75 cents, witnessing a substantial decline from the year-ago quarter’s level of $1.11. The year-over-year fall stemmed from lower revenues and elevated operating expenses. However, the figure came well ahead of the Zacks Consensus Estimate of 66 cents.

Ambarella, Inc. Price, Consensus and EPS Surprise

Ambarella, Inc. Price, Consensus and EPS Surprise | Ambarella, Inc. Quote

Balance Sheet

Ambarella ended the fiscal third quarter with cash and cash equivalents & marketable securities of $414 million, up from $400.1 million recorded in the previous quarter.

During the reported quarter, the company bought back 269,540 shares, for a total cash consideration of $12.8 million. Since the inception of its share-repurchase programs in June 2016, the company has bought back a total of 1,433,137 shares for a total consideration of $71.7 million. Ambarella has approximately $35 million remaining under the $50-million repurchase program, which commenced on Jul 1, 2017.

Guidance

For fourth-quarter fiscal 2018, revenues are expected to be between $68 million and $72 million (mid-point $70 million), down 17.7-22.3% from the year-earlier quarter. The guidance at the mid-point is slightly lower than the Zacks Consensus Estimate of $70.4 million.

The company predicts that the considerable decline in GoPro revenues as well as the moderate fall in the drone market will adversely affect the next quarter’s top-line performance. Additionally, it believes shortage of high-speed memory will thwart its revenues for the coming few quarters. However, Ambarella anticipates strong year-over-year revenue growth in IP security (both professional and consumer), as well as solid growth in automotive and non-sports wearable.

Non-GoPro revenues in the fiscal fourth quarter are likely to plummet to $13 million from $30.2 million reported in the year-ago quarter.

Non-GAAP gross margin is expected to be between 62.0% and 63.5%, as compared with 67.2% recorded in the year-ago quarter. The contraction will be due to increase in China security revenues and decline in sports camera revenues.

Non-GAAP operating expenses are estimated between $28.5 million and $30 million, up sequentially due to “chip takeout fees and engineering headcount increases.”

The company did not give any update on fiscal 2018 outlook. The company, during its fiscal second-quarter earnings conference call, has projected revenues to decline in the range of 3-7% in fiscal 2018. The company anticipates that excluding GoPro and ODMs, its revenues will lie between 9% and 12%.

However, the company did not provide any update on other fiscal 2018 expectations. During its fiscal first-quarter call, Ambarella had provided these forecasts. Gross margins are estimated to move toward the high-end of its target margin range of 59-62%, while operating expense is expected to flare up 12-14% over fiscal 2017 levels.

Following the impressive earnings release, the company’s shares have gained 4.4% in the after-hours trade. An encouraging fiscal fourth-quarter guidance also contributed to yesterday’s gain.

Notably, Ambarella’s shares have underperformed the industry to which it belongs to in the year-to-date period. The stock has been up just 0.3% during the period, while the industry has returned 39.2%.

Currently, Ambarella carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the broader tech space are Broadcom Ltd. AVGO and Rambus, Inc. RMBS, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term expected EPS growth rates for Broadcom and Rambus are 13% and 10%, respectively.

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