Ambarella (AMBA) Q1 Earnings & Revenues Fall Y/Y, View Soft

Ambarella Inc. AMBA reported mixed results for first-quarter fiscal 2019, wherein earnings surpassed the Zacks Consensus Estimate, but revenues marginally fell short of the same. Moreover, on a year-over-year basis, its top- and bottom-line results registered declines mainly due to a substantial decline in chip sales to GoPro Inc. GPRO, along with the prevalent softness in the drone market. Earnings were also affected by elevated operating expenses.

Furthermore, the company provided a soft outlook for the current quarter which hurt investor’s confidence, resulting in a sharp decline in its stock price during yesterdays’ after-hour trade.

The company’s share price plunged nearly 9% in the late-hour trade on Tuesday. Notably, the stock has underperformed the industry to which it belongs to in the past year. Ambarella has lost 17.3% of its value in the said period, while the industry has gained 6.7%.

Let’s discuss the quarterly results in detail.

Quarter in Detail

The company’s fiscal first-quarter revenues slipped 11.2% year over year to $56.9 million, mainly due to the decline in drone, sports and VR camera revenues, partially offset by strong performances in the IP security and auto markets. Moreover, quarterly revenues fell short of the Zacks Consensus Estimate of $58 million. However, the company’s revenues came toward the higher-end of management’s guided range of $54.5-$57.5 million.

Excluding sales to GoPro (GPRO), revenues dipped 12.5% year over year.

The company’s three largest customers who contributed more than 10% to its fiscal first-quarter revenues were WT Microelectronics, Hakuto and Chicony. WT Microelectronics’ contribution totaled 58.3%, while Hakuto and Chicony contributed 12.3% and 11.2%, respectively.

On a non-GAAP basis, the company reported gross margin of 61.8%, which came in 250 basis points (bps) lower than the year-ago quarter. The figure contracted 290 bps from the previous-quarter tally. The decline in gross margin was mainly due to an unfavorable product mix. The company noted that sales of lower-margin China security products increased, while the high-margin drone sales declined in the reported quarter.

Non-GAAP operating expenses came in at $31 million, up from the $25.7 million incurred in the year-ago quarter and $29.5 million reported in fourth-quarter fiscal 2018. Operating expenses flared up mainly due to increased headcount costs as the company continues to invest in development and support headcounts to grab the growing opportunities in the computer-vision market. However, non-GAAP operating expenses remained within the company’s previously guided range of $30-$32 million.

Non-GAAP operating income slipped to $4.2 million from $15.6 million reported in the year-ago quarter. Operating margin shrunk to 7.5% from 24.3% reported in the year-ago quarter, chiefly due to dismal revenues, reduced gross margin and soaring operating expenses.

Non-GAAP net income plunged to $4.5 million from $15.3 million reported in the year-earlier quarter. On per-share basis, the company’s earnings came in at 13 cents, witnessing a substantial decline from the year-ago quarter’s level of 44 cents. This year-over-year fall resulted from lower revenues and elevated operating expenses. However, the figure came well ahead of the Zacks Consensus Estimate of 9 cents.

Balance Sheet

Ambarella ended the fiscal first quarter with cash and cash equivalents & marketable securities of $414.1 million, down from $434.6 million recorded in the previous quarter.

During the reported quarter, the company bought back 437,448 shares, for a total cash consideration of $20.6 million. Since the inception of its share-repurchase programs in June 2016, the company has bought back a total of 1,708,975 shares for a total consideration of $102.4 million. Ambarella has approximately $11.1 million remaining under the $50-million repurchase program, which commenced on Jul 1, 2017.

Guidance

For second-quarter fiscal 2019, revenues are expected between $60 million and $64 million (mid-point $62 million), down 10.6-16.2% from the year-earlier quarter. The guidance is lower than the Zacks Consensus Estimate of $68.8 million.

The company anticipates GoPro revenues to be immaterial to the current-quarter financial results. Non-GoPro revenues are projected to decline 8.6% on a year-over-year basis.

The company predicts that the considerable decline in revenues from the drone market will adversely impact the ongoing quarter’s top-line performance. Additionally, it believes revenues from wearable and non-GoPro sports cameras will decline, particularly in the second half of the fiscal. Furthermore, the company is closely monitoring the trade war between the U.S. and China, the more it intensifies, the more it is a risk for the company’s growth prospects.

Non-GAAP gross margin is expected between 59% and 61%, as compared with 63% recorded in the year-ago quarter. The contraction will be due to increase in China security revenues and decline in drone revenues.

Non-GAAP operating expenses are estimated between $32 million and $33.5 million, up sequentially due to increase in “increased chip tape out fees and engineering headcount.”

Currently, Ambarella carries a Zacks Rank #3 (Hold).

A couple of top-ranked stocks in the broader tech space are Intel INTC and Texas Instruments Incorporated TXN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected EPS growth rates for Intel and Texas Instruments are 8.4% and 9.6%.

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