Ambarella Earnings: What to Watch

Tiny, efficient cameras are becoming essential technology in industry niches ranging from automated driving to computer vision. That trend bodes well for semiconductor-specialist Ambarella (NASDAQ: AMBA), whose intellectual property helps companies in these markets capture and process high-definition video.

Yet competition is fierce over winning an engineering lead in these budding industries. That's why investors will be looking for signs that Ambarella is carving out a defensible sales position when it posts third-quarter results on Nov. 30.

Here are a few trends to keep an eye on in this week's report.

Sales and profits

Executives predicted in late August that third-quarter sales would land somewhere between $87.5 million and $90.5 million. That would translate into at least a 10% decline from the prior-year's results due to a few factors that are negatively impacting its operations today. For one, Ambarella's results aren't being lifted by strong sales from GoPro, which remains one of its biggest customers.

The company is also seeing uneven demand across many of its target markets. While home monitoring and security sales rise, the drone segment isn't growing as quickly as management had hoped. Weak sales are holding the virtual reality niche down, too. Ambarella's last forecast called for overall revenue to fall by about 5% for the full fiscal year to mark its second consecutive annual decline.

As for profits, management's outlook sees gross margin dropping to about 62% from 66% last year. This number is important to follow because expanding profitability confirms that the company is pushing the industry forward with its engineering advances. Otherwise, without a steady stream of innovations, its prices and margins must decline to stay competitive against value-based competition.

New releases

Ambarella has a shot at reversing its two-year sales and profit slide starting late next year -- but only if it can deliver the video capture and compression technologies that product manufacturers in major growth industries need. Its new computer vision chip, CV1, represents its biggest gamble on that score yet.

That semiconductor chip has been in development for four years and is the latest product of Ambarella's elevated research and development spending. CEO Fermi Wang and his team believe the CV1 platform will help them target the massive assisted-driving industry, and they plan for this chip to be the first of many generations that it releases at a range of price points over the coming years.

Wang might have some optimistic comments on the CV1 rollout on Thursday, since many of its biggest customers will get their hands on it over the coming months. But investors shouldn't expect the release to boost operating results over the short term. After all, CV1 won't be widely available until later in 2018 following what Ambarella hopes is a successful demonstration during January's consumer-electronics show. In the meantime, there's no obvious catalyst to drive sales or profits higher, so shareholders are facing the likelihood of another weak operating year ahead.

Sure, Ambarella's fortunes could improve dramatically with a single engineering win. But considering that revenue and profitability metrics are declining due to weakness in several of the company's target markets, this looks like a stock mainly suited for risk-hungry investors.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has a disclosure policy.