Ambarella - Reassuring Earnings And Guidance Delivers Comfort To Investors

Jun. 4.14 | About: Ambarella (AMBA)

Summary

Ambarella comfortably met first quarter expectations.

The second quarter outlook and upbeat comments for the rest of the year are comforting for investors.

I am a buyer on further dips as valuation appeal has improved significantly in recent months.

Ambarella (AMBA) reported a solid set of first quarter earnings on Tuesday, which was came as a relief to investors after shares have seen a correction in recent months during the "momentum" sell-off.

Despite the modest recovery to levels around $25 per share, shares are still down by a third from their highs set around $36 in March of this year.

First Quarter Headlines

Ambarella reported first quarter revenues of $40.9 million, which were up by 21% on the year before and came in above consensus estimates at $40 million.

GAAP earnings rose from $4.7 million to $5.3 million, while growth in earnings per share was limited to a penny due to dilution of the shareholder base. GAAP earnings came in at $0.17 per share.

Often-used non-GAAP earnings advanced by four cents to $0.25 per share. Analysts were looking for unchanged non-GAAP earnings compared to last year.

Looking Into The Results

Topline revenue growth of 21% has been driven by the IP security camera business.

Despite the strong growth, Ambarella faced some margin pressure, with gross margins contracting by 140 basis points to 62.5% of sales. The company managed to reduce R&D expenses by 180 basis points to 31.6% of sales, while selling, general and administrative expenses were up by 130 basis points to 16.5% of sales.

A higher effective tax rate limited GAAP earnings growth as well. Despite increasing taxes, the effective tax rate paid by Ambarella was just 12.0% for the quarter.

Valuing Ambarella

The company ended the quarter with a little more than $155 million in cash, equivalents and marketable securities. As the company does not have debt outstanding, it operates with a solid cash buffer.

Trading around $25 per share, Ambarella is valued at $735 million, which implies that operating assets are valued at $580 million.

For the past year, Ambarella reported revenues of $157.6 million, on which it reported net earnings of $25.6 million. This values operating assets at 3.7 times annual revenues and 22-23 times GAAP earnings.

Modest Confidence Into 2015

CEO Wang states that Ambarella is pleased with the start of the year, as the market for innovative and high definition professional and consumer cameras will continue to grow. The shift from analog to digital will continue and play in the cards of the company as well. As such, the company feels well-positioned for the very important holiday season later this year.

For the current second quarter, revenues are foreseen between $43.5 million and $45.5 million, right in line with consensus estimates. This would result in year-on-year growth of 15% to 21%. Non-GAAP gross margins are seen between 61.5% and 62.5%, which compares to 61.9% reported last year.

Non-GAAP earnings are seen between $8 and $9.5 million, which based on $32 million expected, diluted shares outstanding should translate into earnings of $0.25 to $0.30 per share.

The company anticipates continued growth in the IP security, sports and automotive camera markets.

Takeaway For Investors

It seems that Ambarella had a decent quarter and the tone for the rest of the year is comforting, backed by the second quarter outlook.

The recent correction has made shares quite a bit more appealing in my opinion, trading at 22-23 times last year earnings, which will bring the valuation down to roughly 20 times forward earnings.

That being said, the company is showing impressive growth, although it is slowing down and remains quite small in its scale. I am a buyer, but would await a re-test of levels of $22-$23 reached in recent weeks before picking up some shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.