Ambarella: Another Decent Quarter As Upside Potential Remains

| About: Ambarella (AMBA)
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Shares of Ambarella (NASDAQ:AMBA) spiked in after hours trading after the company released solid second quarter results, combined with a strong outlook for the third quarter. The report comes after shares have seen a correction in recent weeks.

The solid report and upbeat guidance reconfirmed the bright long-term prospects for this profitable company. While reliance on just a few distributors remains an issue, I'm quite optimistic about Ambarella's prospects.

Second Quarter Results

Ambarella generated second quarter revenues of $37.7 million, up 35% on the year before. Revenues came in ahead of the company's own guidance for second quarter revenues of $34.5 to $37.5 million, issued at the release of first quarter results.

GAAP net income rose by 21% to $6.3 million, as diluted earnings per share rose by two cents to $0.21 per share.

Non-GAAP earnings came in at $7.7 million, or at $0.26 per share.

Looking Into The Results

GAAP gross margins fell by 730 basis points to 61.8% of total revenues. Gross margin pressure was offset by positive leverage on research and& development, as well as selling, general and administrative expenses. Combined those expenses fell by 490 basis points to 43.4% of total revenues.

Gross margins have been under pressure from a relative smaller contribution of the infrastructure business, which carries higher margins. Negative product mix developments within the camera segment explain the rest.

As the gross margin impact was greater than the operating leverage throughout the remainder of the business, net earnings growth trailed revenue growth by quite a bit.

And The Quarter Ahead

Third quarter revenues are seen between $43 and $45 million, representing a 21% to 26% increase on the year before, and up 17% compared to the second quarter.

Revenues are now almost entirely driven by cameras which are expected to make up 87-89% of total sales, compared to 81% last year. Both the consumer market as well as security segment are expected to support growth.

Non-GAAP margins are seen between 60% and 62%, down from 61.9% reported in the second quarter, and 64.5% margin in the comparable period last year.

Non-GAAP earnings are seen between $8.0 and $9.5 million.


Ambarella ended its second quarter with $118.3 million in cash and equivalents. The company has no debt outstanding for a solid net cash position.

Revenues for the first six months of the year came in at $71.7 million, up 33% on the year. Net earnings rose by 41% to $11.0 million. At this pace annual revenues could total at least $160 million while earnings could come in between $20-$25 million.

Factoring in gains of 10% in after-hours trading, shares are exchanging hands at $17 per share. This values the equity of the firm at $460 million, or its operating assets around $340 million.

This values operating assets of the firm at 2.1 times annual revenues and 15 times annual earnings.

Ambarella does not pay a dividend at the moment.

Some Historical Perspective

After a somewhat failed public offering, shares of Ambarella were finally sold to the general public at $6 back in October of last year, after being priced in a preliminary price range of $9-$11 per share.

Shares have seen good momentum following decent operating performance as they hit upon highs of $19.50 per share in recent weeks. After a recent correction, and after the 10% jump in after-hours trading, shares are exchanging hands around $17 per share.

Between the calendar year of 2009 and 2012, Ambarella has grown its annual revenues by 69% to $121 million. The company has been solidly profitable in recent years, although relative margins have come under pressure.

Investment Thesis

Ambarella has done it again. The developer of high-definition video cameras and image processing semiconductors reported a very solid set of results, comfortably beating the company's own guidance. The strong performance at the core camera business more than offset weakness in the infrastructure segment, as cameras make up 90% of total revenues as the moment.

Notably the security segment of the camera business was strong, and especially so in China. Both professional users as well as consumers use cameras, among others to monitor their homes. Ambarella notes that the low end of the Chinese market has become more competitive

The automotive business performed well in key countries like Russia, China, Taiwan and South Korea. In Russia, many drivers place a camera on their dashboard to provide evidence for insurance companies when they run into corrupt policemen.

At the same time the reliance on WT Microelectronics as a key supplier remains problematic. WT represented some 59% of total revenues compared to 72% last year. Note that this number was only 40% in the first quarter.

Chicony Electronics company now makes up 28% of total revenues, compared to 11% last year. This still shows the potential risk of extreme distributor concentration, as these two parties make up 87% of total revenues.

In June of this year I last took a look at the company's prospects after reporting its first quarter results. I concluded that after shares have nearly tripled, upside potential remains.

I suspect that Ambarella will continue to go well in the remainder of the year on the back of the solid outlook. As CCTV cameras need to be upgraded across the world, and high-quality security cameras become more price-attractive to normal consumers, the long-term prospects remain good.

Current levels still look reasonably attractive, even though this year's strong momentum and the price action in after-hours trading has pushed up the share price. Obviously the buy case is not as compelling as it might have been earlier this year, but the potential to the upside seems greater than the downside at this point in time.

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.