Why This Is a Critical Quarter for Ambarella

By Frank DiPietro Markets Fool.com

Ambarella Inc. (NASDAQ: AMBA) is slated to report earnings for the first quarter of fiscal year 2018 on June 6. Last time the company reported, jaws dropped as investors learned the company's largest OEM (original equipment manufacturer) customer, accounting for 24% of its revenue, could be about to walk out the door. That makes this a critical quarter for Ambarella as its relationship with GoPro Inc. appears to be nearing an end. Here is what you need to know going into the earnings release.

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The GoPro situation could be clarified

A key concern for investors is the expectation that Ambarella set for its business prospects with GoPro. The last update from the company indicated that GoPro would not be using Ambarella system-on-a-chips (SOCs) for its HERO6 camera scheduled for release later this year. Investors were also told that the company did not expect to do very much business with GoPro going forward. It was strongly hinted that GoPro would be switching to use an application specific integrated circuit (ASIC) for HERO6 and would no longer have a need to use Ambarella's products.

On April 27, GoPro Inc. held its Q1 conference call and did not counter that impression.

During the Q&A, GoPro CFO Charles Prober responded to a question that seemed to imply plans were still in place to launch HERO6 using the ASIC instead of the Ambarella SOC.

Here is the question from analyst Stanley Kovler:

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... I wanted to ask you what kind of progress you're making on the chip development of the new chip as you move away from your previous partner. If you can update us on that situation.

Here is Prober's answer:

... we don't really discuss the -- our future products and road map. But I will say that there's no change of plans in terms of launching HERO6 in 2017.

That left investors clinging to what Ambarella management had said in late February:

... based on our current level of interaction with GoPro on product development activities, we believe GoPro is incorporating a competitive chip for at least 1 new mainstream camera product which will negatively impact our revenues in the second half of the year.

If there has been a change in GoPro's plan, or more clarity about what is going to happen, we may hear about it during Ambarella's earnings call.

For instance, if GoPro were to run into technical challenges launching HERO6 and either cancel or postpone the use of its new ASIC, the company might be forced to buy more SOCs from Ambarella. That could cause Ambarella to raise guidance and surprise the market.

Autonomous vehicle enabled by Ambarella video solutions. Image source: Ambarella.

There could be autonomous-driving news

Investors will be interested to hear more about Ambarella's computer vision chip, CV1, which is expected out this summer and may be useful in autonomous vehicles. Currently Ambarella has worked with the likes of Nissan, Toyota, and Mercedes for other products such as dashboard cameras and electronic mirrors.

The company does not expect to see significant revenue from CV1 until next year and expects its first customers for the product to be IP security camera companies and drone manufacturers.

The numbers

Ambarella issued guidance on Feb. 28 for its first quarter. The company's forecast is shown in the table below.

Metric Guidance Q1 Fiscal 2018 Guidance for Full Year Fiscal 2018 Q1 Fiscal 2017
Revenue $62.5 million to $64.5 million $301.0 million to $319.6 million $57.2 million
Non-GAAP gross margin 63% to 64.5% high end of 59% to 62% 64.6 %

Data source: Ambarella. Non-GAAP = adjusted. Chart by author.

The company also told investors that in fiscal year 2017, 24% of the company's revenue, or approximately $75 million, resulted from GoPro.For the current fiscal year, at the midpoint of guidance management estimates 4.5% of revenue, or approximately $14 million, will be driven by GoPro.

If there's a change in the GoPro situation, guidance could be updated.

Stay tuned

This is truly a transition year for Ambarella as it prepares for life after GoPro and begins sampling its new CV1 SOC.

Ambarella's management has historically been quite candid in giving investors insight into changes in its business, so investors will want to tune in to the upcoming earnings report and conference call. Time will tell how the GoPro situation shakes out and how Ambarella transitions.

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Frank DiPietro owns shares of Ambarella. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.