Summary
Most of the impetus came from the well received Q1 figures.
The stock will probably digest these gains, but we still expect them to be materially higher in a year, as most of the problems will evaporate by Q4.
We do have some minor concerns though.
The market was impressed (the stock jumped 10% or so) with the Q1 figures and guidance. The GoPro trouble (sales and inventory problems at their main customer), which was always likely to be temporary, has already been priced in for quite some time, but only now some rejoicing seems to occur.
But then financial markets have their own way of timing issues and these don't necessary correspond with the rationalizations of any one commenter, least of all us perhaps.
After the GoPro troubles we now have the Sony camera sensor troubles (due to the Japanese earthquake), and this is affecting 40%-45% of revenue, but to what extent is difficult to say.
The market is right this time as to treat this as a non-event, as this too will pass, although not before creating problems in Q2 and Q3. The Sony plant is scheduled to be back to full production by the end of August.
What we were impressed with were the design wins. The list is long:
- Xiaomi with the Mi Drone and Ambarella's A7L or A12 SoCs
- ADT with the OC835 outdoor home monitoring camera based on the S2L SoC
- Yi Technology with its YI Home Camera 2 based on the S2LM SoC
- Ring with its Video Doorbell Pro based on the S2LM SoC
- August with its WiFi doorbell cam
- Yi Technology and its Yi 2 Action Camera based on the A9SE SoC
- Peugeot installing Garmin's video recorder based on the A7L SoC
- Qihoo 360's new dash cams based on the A7L or A12A SoC's
- LeTV's dash cam based on the A12 SoC
- JVC Kenwood's DVR-610 dash camera based on the A12 SoC
- Google, working with Yi Technology's VR camera based on the A9SE SoC
- HumanEyes' Vuze 3D VR camera based on the A9SE SoC
- Wushilan's Insta 360 Nano VR camera based on the A12 SoC
This goes some way to ease the fears that the company's lunch is about to be eaten by increased competition, although the problems with GoPro, the Sony sensor, and the decline in the Chinese home security markets will keep revenues flat to 5% below where they were last year.
But even in these weak sectors, recovery is at hand and this will lead to a strong second half. Hence almost flat revenue for the year, as the first half is down significantly mostly because of GoPro.
Indeed, when asked during the Q1CC, CFO George Laplante confirmed that the revenue growth guidance for the year would have been higher than -5% to 0% if not for the Sony sensor problems. This indeed suggests that underlying growth is strong, and the action camera problems will disappear.
The weak Q1 in the Chinese security market was actually good for margins, which held up very well despite the decline in earnings. Due to the uncertainties with the Sony sensor, it is difficult to predict margins for the year as a whole.
Buyback and competition
There are things we do not like all that much. There is a large difference between GAAP ($1.8M or $0.05 per share) and non-GAAP earnings ($11.4M or $0.34 per share), and this is mostly due to stock based compensation.
This isn't unusual in an emerging high-tech company (a full 82% of its workforce are engineers!), but we have yet to encounter any good reason anywhere why one should add stock based compensation to earnings.
We also don't see the point of the $75M stock buyback program. This seems a waste of money to us. If it's to counter the share issues with respect to stock based compensation, then there is even less reason to add these to earnings.
While the company is in good financial health, with a solid balance sheet (cash and marketable securities of $324M and no debt) and positive cash flow from operations ($15.5M) even in this difficult quarter we think they could use the money more wisely.
For instance, they are making a major effort in Computer Vision, ramping up the software team for different applications (rather than just automotive). The drone market is about to explode with the FAA expecting that more than a million drones (most of which for recreational purposes) will be sold this Christmas in the US alone.
And the rest of the world will not wait either, prices are falling with the cheap Xiaomi Mi drone with 4K camera which will sell for just $450, breaking a price barrier. Both versions (there is an even cheaper HD version for $380) come with an Ambarella SoC inside for the video processing. The company expressed a lot of confidence in this market as they have a wide range of solutions for the whole spectrum (lo to high-end).
The company is dominating in the high-end with 4K processing, but with the A12 they can push 1440p HDR processing all the way down to the low end ($199).
The company has so many market opportunities (as we discussed in our previous article, this is one of the main reasons we're attracted to this name) that they should not waste cash on buybacks, in our view.
Also, there are many Ambarella observers who fret about competition, more especially emerging from Qualcomm (NASDAQ:QCOM). President and CEO Fermi Wang is not one of them, here he is during the CC, when asked about Qualcomm:
I think they still either focus on the high end drone products like control [ph] portion, not a video portion or for a low end drone, they try to do a total solution. But, in our current latest roadmap to our customer that we show A12 and A9ES and H2 could cover on low end to mid end, to high end, we have a complete road map to grow against our competitors. So, in quick summary, in the last three months, we don't see the composition landscape changed.
Conclusion
There are positive things to take away from the Q1 figures and conference call. Most importantly, the problems (action camera's, Sony sensor) only have a temporary impact, underlying growth will emerge to be solid when these effects peter out in the second half of the year.
Secondly, management doesn't seem to be overly worried about the competition. This could be too optimistic, but for now, management seems to have a point.
The company is financially healthy and has ample growth opportunities in a host of emerging markets, most of which we discussed in our previous article.
On non-GAAP metrics the company is still reasonably valued, but we can't think of a good (or any) reason why stock based compensation has to be added to earnings, and this makes a rather substantial difference.
We think for now most of the easy money has been made, but we expect the shares to still be substantially higher in a year or so, unless something unforeseen happens.
Disclosure: I am/we are long AMBA.
By Shareholders Unite
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