5 Things Ambarella Management Wants You to Know

Ambarella released its second-quarter earnings after market close on Sept. 1, delivering results that were better than the average analyst estimate as polled by Thomson Reuters. Net income of $29.7 million worked out to diluted earnings per share of $0.88, or 10% ahead of the Reuters poll target of $0.80. Revenue for the quarter was $84.2 million, ahead of the Reuters estimate of $81.73 million.

Despite a solid earnings beat, Ambarella shares are down more than 20% following the earnings release, owing to lower-than-expected guidance. During the briefing, CEO Fermi Wang and CFO George Laplante discussed second-quarter results and outlined the future of the business and competitive landscape. Here are five key takeaways from the call.

Third-quarter performance guidanceFor the current quarter, Ambarella anticipates sales between $90 million and $93 million, a range that would represent year-over-year quarterly sales growth between 37% and 42%. Before the earnings call, the Wall Street consensus called for growth of 40.6%, and subsequent sell-offs and analyst commentary suggest disappointment with the company's sales target. Turning to margins, Laplante said the company anticipates non-GAAP gross margins for the third quarter to be between 62.5% and 64%, with the anticipated dip from gross margins of 65.3% in the second quarter coming from increased sales share for the relatively low-margin S2L line security chips.

Here's Laplante on third-quarter targets for net income, estimated tax rate, and share count:

Q3 wearable sales will be down, but overall momentum is strongAmbarella's second quarter saw the release of an inordinately high number of new product releases, helping the company deliver 79.3% year-over-year sales growth and setting up unfavorable sequential and yearly comparisons for third-quarter segment performance. Here's Wang on the state of the wearables market and broader business in the third quarter:

With an apparent lack of big wearable camera releases in the third quarter, Ambarella is looking to new product releases in security, automotive aftermarket, and drone cameras to drive growth.

Demand for consumer security cameras is growingSo far, the large majority of Ambarella's revenues have come from its wearable and professional security IP cameras, but the company anticipates that adoption of consumer IP cameras will be a significant growth driver going forward. During the call, Laplante indicated that the company had seen increased demand from retailers for consumer security cameras, as well as service providers such as AT&T and Comcast. Here's Laplante on the outlook for consumer security cameras through the rest of the year and the role of service providers in spurring growth:

Laplante also said the company is seeing similar momentum in China, with Internet service providers beginning to offer security cameras as part of smart home packages.

Ambarella's acquisition of VisLab should help it get design winsIn July, Ambarella acquired visual analytics firm VisLab for $30 million in cash, and the company anticipates that its new subsidiary can deliver wins in emerging product segments. Here's Wang on the company's most recent acquisition:

VisLab has developed computer vision technologies that could help Ambarella secure presence in smart cars and propel its broader efforts in Internet of Things tech. The VisLab acquisition could also prove beneficial to Ambarella's drone ambitions, as delivering high-performance solutions for object avoidance and self-piloting, in addition to top-notch video, will likely be necessary to remain at the forefront of the market. Ambarella anticipates that operating expenses for VisLab will run between $1.1 million and $1.2 million in each of the two remaining FY16 quarters. However, the company doesn't plan on reporting the unit's operating expenses separately going forward.

Ambarella believes it's positioned to fend off potential new competitorsAmbarella's high-performance, low-power-consumption video chips have helped it build a strong niche position in semiconductors. However, the company looks to be facing increased competition. Companies including Intel, Qualcomm, and NVIDIA have expressed interest in creating solutions for drone cameras -- a crucial market for Ambarella -- and new entrants in the space could represent a significant challenge to Ambarella's growth. Yet even with the possibility of new entrants from resource-rich competitors, Ambarella believes that the strengths of its solutions will help it continue to secure design wins. Again from Wang:

Wang also emphasized that, thus far, customers in the drone market are putting an emphasis on video and image quality, and the lack of specialized solutions from competitors positions Ambarella to continue delivering the best-performing product.

The article 5 Things Ambarella Management Wants You to Know originally appeared on Fool.com.

Keith Noonan has no position in any stocks mentioned. The Motley Fool owns and recommends AMBA, INTC, and QCOM. The Motley Fool recommends NVDA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.