Shares of Ambarella Inc. AMBA went down 8.3% in after-hours trading after the company provided a tepid fourth quarter fiscal 2016 revenue guidance.
The company reported third quarter fiscal 2016 earnings (including stock-based compensation expenses) of 87 cents per share, which beat the Zacks Consensus Estimate of 71 cents. Moreover, earnings increased from 57 cents per share reported in the year-ago quarter.
Quarter Details
Ambarella’s third quarter revenues not only increased 41.9% year over year to $93.2 million but also came ahead of the Zacks Consensus Estimate of $91 million. The year-over-year improvement was attributed to better-than-expected growth of Ambarella’s products, which are used in a wide variety of HD and ultra HD cameras, especially security IP-cameras (the main business driver), dash cameras, flying cameras, and vehicle video camera recorders. Also, higher sales from auto aftermarket revenues positively impacted the quarter’s results.
Ambarella’s gross margin was up 246 basis points (bps) from the year-ago quarter to 65.7%, primarily due to higher flying camera and auto aftermarket revenues as well as higher revenue base.
The company’s operating expenses increased 35% from the year-ago quarter. The increase was primarily due to higher chip development and employee compensation expenses along with higher research and development and selling, general and administrative expenses. As a percentage of revenue operating expenses were down 168 bps year over year. The company reported operating income of $30.3 million compared with $18.7 million reported in the year-ago quarter. Operating margin expanded 415 bps year over year and came in at 32.5%.
Ambarella’s net income (including stock based compensation expenses) came in at $29.5 million or 87 cents per share compared with $18.3 million or 57 cents per share reported in the year-ago quarter.
Ambarella exited the third quarter with cash and cash equivalents and marketable securities of $276.7 million compared with $239.8 million in the previous quarter. Receivables were $46.3 million compared with $42.1 million in the prior quarter. The company had no long-term debt during the quarter.
Outlook
For the fourth quarter of fiscal 2016, Ambarella expects total revenue in the range of $65 million to $67.5 million. The Zacks Consensus Estimate is pegged at $78 million. Non-GAAP gross margin is expected to be in the range of 63% to 64.5%. The company expects non-GAAP net income for the fourth quarter of fiscal 2016 in the range of $15 million to $17 million.
Conclusion
Ambarella reported better-than-expected third quarter fiscal 2016 results. Year-over-year comparisons were also favourable, primarily driven by higher sales from Ambarella’s products. However, the company provided a tepid fourth quarter revenue guidance.
Ambarella develops chips for the high-definition (HD) video capture market and is currently witnessing increasing demand for its products.
Furthermore, since Ambarella started working with GoPro, its top line increased significantly. The chipmaker’s technology is used in GoPro’s first person point-of-view cameras, allowing users to take videos from snowboards, surfboards, or car dashboards. The company has also partnered with Alphabet Inc. GOOGL for its “Helpouts” services. These services help users with a range of jobs from fixing their cars to taking art lessons, through a video camera connected to Wi-Fi or Bluetooth network.
Additionally, Ambarella has been trying to expand its reach in other markets too, such as IP security, automotive, and drones/flying cameras. In July, the company acquired VisLab S.r.l. in an all-cash deal worth $30 million. By integrating VisLab’s computer vision and intelligent control systems with its video processing technology, Ambarella will be able to develop high performance products and target its core markets — automotive, IP security, wearable and flying cameras.
Also, the VisLab takeover will boost Ambarella’s product portfolio and help it to compete with Israel-based Mobileye N.V. MBLY, currently the world’s leading provider of driver assistance technology.
However, the company has been criticized for the lack of innovation by short-seller, Citron Research. According to Citron, the company faces severe commoditization risks and hence, stiff competition, going ahead.
Currently, Ambarella has a Zacks Rank #3 (Hold). A better-ranked stock worth considering is VASCO Data Security International Inc. VDSI, which has a Zacks Rank #1 (Strong Buy).
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