Ambarella Keeps Sales, Profits Up With Sharp HD Focus

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Like the high-definition cameras his customers sell,Ambarella Chief Executive Fermi Wang has an ultrasharp focus.

Newly publicAmbarella ( AMBA ) is a leading developer of low-power, HD video compression and image processing semiconductors. Its products are used in all sorts of cameras, including wearable sports cameras, security IP-cameras, digital still cameras and automotive video recorders. Ambarella technology is also used in TV broadcasting with TV programs being transmitted worldwide using Ambarella compression chips.

Its system-on-a-chip, or SoC, designs HD video processing, image processing, audio processing and system functions onto a single chip to deliver very high video and image quality, various functions and low battery power consumption.


Ambarella made its stock market debut in October and has enjoyed an impressive run ever since with two quarters of double-digit sales and earnings growth. In its most recent fourth quarter ended Jan. 31, profits surged 80% to 18 cents a share, while sales climbed 28% to $31.5 million.

Wang says the GoPro wearable sports camera line is the hottest seller among products using Ambarella's chips. GoPro's cameras let skiers, surfers and other sports enthusiasts record their activities as they experience them. Ambarella is the sole supplier of video chips to GoPro. When GoPro's sales go up, so do Ambarella's, says Wang.

Security Cameras

Another fast-growing market for Ambarella is in IP (Internet Protocol) security cameras, such as the ones you find in airports and banks. This market contributed strong margin and sales gains in the fourth quarter.

But judging from Wang's growth strategy, he isn't resting on his laurels. He has a sharp focus on gaining more mileage from the company's technology.

"We continue to focus on applications where we can add value," he told IBD. "In addition to that, we need to pay attention to adjacent video markets where we can leverage our current technology and expertise."

One hot prospect is a new type of wearable camera.

Ambarella has developed a reference design for a new category of wearable cameras the size of a quarter, Wang says. The wearable cameras can be used for a variety of applications, such as police and firefighters, for people who want to record continually while on vacations or even brides who put them in their bouquets to record their trips down the aisle.

As Ambarella is able to analyze the data captured in the video, customer-service people at large department and other stores might wear them to record customer transactions, and to analyze how much time customers spend looking at certain items, says Wang.

Wang isn't the only one focused on Ambarella's growth. So are investors. Ambarella's stock price has nearly doubled since it came out of the gate.

Stifel, Nicolaus & Co. analyst Kevin Cassidy says Ambarella got a "fairly subdued" reception in the market when it came out with its IPO, and its initial pricing was low at $6 a share.

Following two good quarters, he adds, investors have gotten more "comfortable" that the company will be around for a while.

Ambarella's strength lies in its experienced team and technology, says Wang.

"Our strength is our founding team that has been working on video products and video design for more than 20 years," said Wang.

"The core technology is the image and video processing algorithms. They allow us to build a central processing unit architecture to provide outstanding video quality and compression efficiency and lower power consumption" for our customers, he said.

He attributes Ambarella's strong growth to the fact that Ambarella focuses on markets where it can "differentiate" its products from others and where it can use its expertise in video compression.

Analysts polled by Thomson Reuters expect Ambarella to see a 5% increase in earnings per share to 83 cents a share in the current fiscal 2014 fiscal year.

They see it gaining momentum after that with a 30% jump in fiscal 2015 and a 46% rise the following year.

"The secular trend toward video content continues to evolve and spread, and the company is optimistic about growing along with it," said Deutsche Bank Securities analyst Ross Seymore. "The common link is the desire to create high quality video and share it."

Seymore says Ambarella is "executing very well." He estimates revenue will rise 23% this year after a 24.5% gain last year.

Ambarella is one of the leaders, if not the leader, in the video processing systems-on-a-chip arena, analysts say.

Cassidy says some companies incorporate Ambarella's capabilities in its chips to do other things, but they're not solely focused on developing video processing systems on a chip.

He says Ambarella's closet competitor isTexas Instruments ( TXN ), which has a division that sells a camera chip.

But he says it isn't a big portion of the semiconductor giant's business.

Cassidy expects Ambarella to continue to cash into new market trends.

"As a technology continues to evolve, the market leader can stay ahead of competitors by being first to market in the next standard or feature," he noted in a report.

Among the new areas for potential product differentiation is the wearable camera.

Unstaged Video

"While sports cameras such as Ambarella-enabled GoPro are popular for unstaged action video, we see a trend toward smaller form factor, lower-power video cameras on glasses or labels or other clothing to open new applications for event video recording outside of sports," he wrote.

Ambarella doesn't make its chips. It uses manufacturers that make silicon chips for other semiconductor outfits.

Ambarella sells its designs to original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs, globally. It generates revenue from the sale of its HD video and image processing SoC solutions to OEMs and ODMs.

Axis Communications and Hikvision are among Ambarella's customers in the IP camera market. And GoPro is a key customer in the sports camera arena.

Most of its costs are in R&D, says Cassidy. Once Ambarella designs a chip, that same one can be used in a GoPro camera and a surveillance camera, and as they go into volume production they take the profits and go onto the next R&D project, he says.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AMBA , TXN

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