When Ambarella (NASDAQ: AMBA) announced fiscal third-quarter 2018 results last week, shares of the video-processing chip specialist soared more than 16% the following day. But Ambarella's performance certainly didn't look good at first glance. Revenue fell 11.4% year over year to $89.1 million, which translated to a 32.4% decline in adjusted earnings per share to $0.75.
Still, revenue arrived well within Ambarella's latest guidance, and the bottom line was comfortably ahead of Wall Street's prediction for earnings of $0.67 per share.
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Of course, this illustrates the need for investors to dig deeper in an effort to better understand Ambarella's underlying business. So let's take a closer look at five important points that Ambarella management discussed during the quarter's subsequent conference call.
1. Non-GoPro revenue streams are (mostly) solid
Said Ambarella CEO Dr. Fermi Wang:
As GoPro's (NASDAQ: GPRO) former video-processing chip supplier of choice, the action-camera company previously represented as much as a third of Ambarella's revenue in any given quarter. But GoPro opted to engineer its own chip, dubbed the "GP1," for its latest HERO6 camera line -- a move which Ambarella management warned earlier this year would hurt sales in the second half.
Revenue from GoPro fell 47% year over year this quarter, to $18.4 million, or 20% of total sales. But Ambarella's efforts to differentiate into the IP security and automotive OEM markets have helped spur those declines. That said, although Ambarella's chips still have homes in many higher-end drones, the rise of cheaper drones and softness at tier 2 drone customers have hurt flying-camera chip sales.
2. On getting its first computer-vision chip into customers' hands
Dr. Fermi Wang:
Ambarella told investors in September that it was set to begin sampling the CV1 chip (the "CV" stands for "computer vision") at key customers by the start of the fiscal fourth quarter. This means its next-generation chip is ahead of schedule, even after meeting the aforementioned "aggressive" target specifications. Looking ahead, Ambarella sees demand for chips capable of handling more complicated computer-vision tasks setting the stage for longer-term growth.
3. New computer-vision SoCs are on the way
Dr. Fermi Wang:
The tech world changes quickly, so Ambarella investors should be pleased to know that the company isn't hitting the brakes on its computer-vision efforts anytime soon. These new SoCs will provide OEMs an easily integrated package to address computationally intense computer-vision tasks in new security cameras, drones, virtual reality devices, and advanced driver-assistance systems in the automotive space.
4. On the effects of continued memory shortages
Ambarella CFO George Laplante:
Memory shortages certainly won't help Ambarella's quest to return to sustained profitable growth, as the situation will impact the build schedules for key camera customers outside of GoPro. It helps, however, that Ambarella first cautioned investors about this shortage three months ago. And it's not an unprecedented situation; last year's earthquakes resulted in similar disruptions, following shortages of certain image sensors. In any case, this is a temporary issue that should be resolved within the next few quarters.
5. On Ambarella's long-term relationship with GoPro
To be clear, GoPro hasn't completely abandoned Ambarella yet. In fact, early in the call management said that GoPro's new Fusion 360-degree camera is based on an Ambarella SoC. Ambarella's chips are also still found in GoPro's previous-generation HERO5 cameras.
But the HERO5 will be phased out some time next year. Combined with uncertain early demand for GoPro's Fusion, and GoPro's in-house chip in its HERO6 line, it's prudent for Ambarella management to continue distancing themselves from this formerly lucrative customer relationship.
The bottom line
Despite its GoPro-related declines, Ambarella has continued to make strides in diversification while planting seeds for future growth in the computer-vision market. So while this quarter's results were far from perfect, they were exactly what Ambarella shareholders had wanted to hear. With shares down slightly from the start of the year leading up to last week's announcement, it was no surprise to see investors so aggressively bidding up Ambarella stock in response.
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