What to Watch When Ambarella, Inc. Reports Earnings

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Ambarella Inc. is set to release fiscal first-quarter 2017 results Thursday, June 2, 2016, after the market close. With shares down 25% year to date as of this writing, the market will be watching closely for signs that thevideo processing chip specialist's long-term growth story remains intact.

But what, exactly, should investors be watching for when Ambarella's report hits the wires?

For perspective, shares plunged last quarter as continued weakness in the wearable camera spaceprevious quartersGoPro , which effectively dominates the wearable camera space and has previously comprised as much as 30% of Ambarella's total revenue.

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But it was no mystery wearables were a problem; Ambarella CFO George Laplante even warned investors two quarters ago that high inventory levels in wearable sports cameras would have a significant negative impact on shipments extending (at the very least) into the early part of this fiscal year. More specifically, Laplante stated that demand from GoPro had declined to the low-single digits as a percentage of total revenue through the first few weeks of the quarter.

As such, Ambarella's latest guidance calls for fiscal Q1 revenue of $55 million to $57 million, or a year-over-year decline of 24% to 20%, and adjusted net income between $8 million and $10 million, down from $23.7 million in the same year-ago period.

Laplant also noted the weakness was unlikely to abate until GoPro launches new products featuring its chips. At the same time, it's worth noting GoPro did exceed expectations for revenue

With that in mind, Laplant cautioned that Ambarella would take a conservative view regarding modeling wearable camera chip shipments until it has "a better picture of end-user demand in this market." Investors should listen carefully, then, for any clarification on the topic now that Ambarella has another quarter under its belt.

In addition, keep an ear open for any comments from management on the looming threat of competitionQualcomm is "talking" with its core customers in both the action and flying camera industries. At the same time, Wang also insisted Qualcomm's progress has been muted to date as its "ad processor base solution is quite behind in video quality, compression efficiency, power consumption, video features, and performance."

Put another way: Ambarella has done an admirable job taking and sustaining market share through its focus on innovation and introduction of industry-leading products. Nonetheless, that won't stop the competition from continuing to fight for a larger piece of the market -- even if it means muscling its way into Ambarella's niche and/or pressuring margins with a value-priced "good-enough" product -- and this quarter's call could offer an important peek at Ambarella's current competitive state.

Finally, if last year's fiscal Q1 call is any indication, expect Ambarella to offer financial guidance for the fiscal second quarter of 2017, including approximate ranges for revenue, adjusted gross margin, and adjusted net income on a dollar basis, as well as some rough quantifying comments on its expected segment performance.

To that end, I wouldn't hold my breath for any specific financial guidance for the full fiscal year just yet, save comments on seasonality based on expected product launches for the rest of the year. But as long as Ambarella continues to navigate this fast-changing, fast-growing market, staving off the competition with new design wins across multiple segments, long-term investors willing to endure this near-term lull should be pleased with the company's direction.

The article What to Watch When Ambarella, Inc. Reports Earnings

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