Ambarella, Inc. (AMBA)

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Ambarella, Inc. (AMBA)

F1Q14 Earnings Conference Call

June 4, 2013 5:00 p.m. ET

Executives

Deborah Stapleton - Investor Relations

Fermi Wang - President and Chief Executive Officer

George Laplante - Chief Financial Officer

Analysts

Joe Moore - Morgan Stanley

Quinn Bolton - Needham & Company

Ross Seymore - Deutsche Bank

Presentation

Operator


Good day, ladies and gentlemen and thank you for standing by and welcome to the Ambarella First Quarter Fiscal Year 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference maybe recorded. It's now my pleasure to turn the floor over to Deborah Stapleton. Thank you. Please go ahead.

Deborah Stapleton

Good afternoon, everyone, and welcome to Ambarella's first fiscal quarter financial results conference call. Thank you for joining us today. Our speakers will be Dr. Fermi Wang, President and CEO; and George Laplante, CFO.

The primary purpose of today’s call is to provide you with the information regarding our fiscal first quarter. The discussion today and the responses to your questions will contain forward-looking statements regarding our financial prospects, market growth and demand for our solutions, among other things. These are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements. These risks, uncertainties and assumptions, as well as other information are potential risk factors that could affect our financial results are more fully described in the documents that we file with the SEC, including the annual report on Form 10-K that we filed on April 4 for the 2013 fiscal year and the Form 10-Q which will be filed shortly.

Access to our first quarter results press release, historical results, SEC filings and a replay of today's call can all be found on the Investor Relations portion of our website. I'll now turn the call over to Dr. Fermi Wang. Fermi?

Fermi Wang

Thank you, Deborah, and good afternoon everyone. Our Q1 revenue was $33.9 million, up 31% from the $25.9 million we reported in the first quarter a year ago. Our Q1 non-GAAP net income was $6.2 million or $0.21 per diluted share. This compares with the non-GAAP net income of $3.5 million or $0.11 per diluted ordinary share for the same period for fiscal 2013.

I would like to discuss some of our products and the marketing highlights then I will turn it over to George for more in depth discussion of our first quarter financial performance and our guidance for Q2. In IP leading surveillance market, we have (inaudible) increases in design activity for the security camera consumer to move from analog to digital IP and from standard definition to high definition where we play. During the ISC West International Security Conference held in Las Vegas in April, we demonstrated a wide-range of high-definition video solutions, including our new S2 camera SoC with 4K or ultra-HD resolution. The 4K resolution capability enables S2 based IP camera to capture the finest details from people's face or object, even when shot from a distance.

Additionally the S2's capability to develop images, allowed the design of IP camera that use wide angle lenses to record images captured over wide area. Ambarella also demonstrated its Wi-Fi IP camera platform using the A5s camera SoC. This solution is helping enable design wins both in professional IP camera location as well as in the new phone consumer applications that leverage home Wi-Fi networks, cloud services and the smartphone applications. During the ISC West Show, Pelcos the leading U.S. supplier of video surveillance equipment introduced its new Sarix professional range of IP camera based on Ambarella's A5s family of SoC. The extensive new product range includes a 5-megapixel mini-dome, (inaudible) camera and box IP cameras.

Additionally, (inaudible) a leading of Chinese supplier of video surveillance equipment, introduced its new [HF 5100 and HF 5200] 720p and 1080p IP camera based on Ambarella's A5s SoC. Also during the ISC West show, [Bosch] of Germany demonstrated a 4K resolution IP camera for the first time, highlighting the market requirements and the trends towards higher resolution. In summary, the IP video surveillance market is growing rapidly and we believe Ambarella is in excellent position to capitalize upon this growth based on its partnerships with the leading suppliers in China, Europe and in the U.S.

In the consumer camera market we continued to see significant growth in wearable sports camera and a decline in sales of traditional camcorders. The growth in wearable sports camera is driven by market leader GoPro with its popular HERO3 camera which are based on Ambarella's A5s and A7 SoC. Consumers are increasingly demanding the highest resolution video including 1080p 60 and a 4K or ultra-HD video. Televisions with 4K display capability have already $1500 price points for 50-inch models. That should help consumer to drive demand for 4K resolution cameras. Additionally, the capability to wirelessly connect the sports camera to smartphones allows user to preview the video from a sports camera as well as the ability to play it back and upload it to the internet via the cellular network.

This capability makes sports cameras far easier to use and to customer base beyond just camera resolution. We expect the wearable sports camera capability to continue to grow significantly as it becomes a major camera category replacing camera form factors. In the automotive aftermarket, Ambarella provides SoC solutions for windshield mounted camera recorders or what's currently being referred to in the press as dash cams. During the first quarter we showed continued growth driven by strong sales in high-definition camera solutions in Russia and in Asia.

At the China Sourcing Fair, a major Asian electronic show held in Hong Kong during April, we demonstrated a variety of new camera designs including view camera, Wi-Fi connected, 1080p 60 resolution and super-wide angle solutions. Multiple ODMs also demonstrated new camera products based on Ambarella's new A7L-A family of SoCs, that were introduced during the consumer electronics show in January. In total, more than 150 companies both ODM and OEM visited with Ambarella at the Hong Kong demonstrating the growing interest level in this important market segment and in Ambarella solutions.

In the video infrastructure business, Ambarella provides encoder solutions for television broadcast and transcoders, and a video contribution system. I have mentioned in the last earnings call, we continue to see lower demand for traditional broadcast (inaudible) market. While we believe it's primarily driven by macro-market conditions in the U.S. and Europe, we see continued growth in transcoder market and real opportunities in video contribution systems. During the April National Association of Broadcasters or NAB Show in Las Vegas, Ambarella introduced the AmbaCast 8000 System on Chip. This SoC provides a flexible platform to increase the quality and the density of video transcoders and video contribution systems.

Video contribution systems transmit video from remote sources such as satellite news gathering units to broadcast studios or from broadcast studios to uplink centers or cable head-ends. The AmbaCast 8000 is capable of simultaneously decoding and re-encoding four full HD channels, eight 720p HD channels or twenty standard resolution SD channels. It can also encode video up to 4K or Ultra HD resolution. Also during the NAB show, Harmonic, the leading supplier of broadcast and video infrastructure solutions, introduced its Ellipse 3000, the industry's first video contribution system based on the new AmbaCast 8000 SoC. Dolby Laboratories also announced its support for AmbaCast 8000 platform during the show as it provides the ideal platform for Dolby Digital Plus surround sound.

The introduction of AmbaCast 8000 SoC provides Ambarella the opportunity to expand our position in transcoding systems while also entering the video contribution market for the first time.

With that, I will hand it over to George to discuss our financials.

George Laplante

Thank you, Fermi and good afternoon everyone. I will start today's call with a summary of the financial results for the first quarter of our fiscal year 2014 that ended on April 30, 2013, and then move on to the outlook for Q2 of this fiscal year. During the call I'll discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For Non-GAAP reporting, we have eliminated stock-based compensation expense as adjusted for income taxes. As we discussed in the past, the company has seasonality to both its revenue and gross margins. So I will include year-on-year comparisons for certain key operating metrics to assist in the understanding of changes in our business.

I will now discuss the financial results for the company's key operating metrics starting with revenue. For our first fiscal 2014 quarter that ended on April 30, 2013, the company had net revenues of $33.9 million. The Q1 revenue of $33.9 million represented an increase of 31% over the $25.9 million in revenue for the same period in the prior year. Camera market revenue is estimated at 86% of Q1 revenue as compared to 67% for the same period in the prior year. We continue to experience strong year-over-year growth in our professional and consumer IP security, wearable sport, and automotive camera market.

Sports camera market was especially strong in Q1 due to the successful ramp of several new camera models in introduced at the end of last year by GoPro. As discussed in our year-end call, we believe infrastructure market revenues continue to be negatively impacted by macro-market conditions in the U.S. and Europe, recording lower revenues both sequentially and year-over-year. In addition, infrastructure revenue in Q1 of the prior year was unusually high due to the release of approximately $1.6 million of deferred revenue as a result of renegotiation of a large customer contract.

Ambarella uses WT Microelectronics as our logistics partner for distribution to the majority of our ODM and OEM customers. For the quarter ended, April 30, 2013, sales to WT represented 40% of our revenue as compared to 75%of our revenue for the same period in the prior year. Chicony Electronics Company, a manufacturer of camera products for multiple OEM customers as well as for their own distribution, represented 42% of the revenue for the quarter compared to 4% for the same period in the prior year. WT and Chicony were the company’s only 10% customers.

Non-GAAP gross margins for Q1 2014 was 64% as compared to 63.3% in the immediate preceding quarter and 71.1% in the first quarter of the prior year. In comparison to the preceding quarter, both camera market and the infrastructure market demonstrated small increases in gross margins which were partially offset by a decline in infrastructure revenues as a percent of total revenue for the quarter. In camera market, a favorable mix-change from Q4 to Q1 contributed to the sequential improvement in gross margin. As I previously mentioned, the gross margin in the prior year first quarter was positively impacted by the release of $1.6 million in deferred infrastructure revenue which caused an unusually high mix of infrastructure revenue to total revenue, resulting in high gross margin for that period.

Non-GAAP operating expenses for Q1 2014 were $14.9 million, compared to $14.8 million for Q4 of 2013 and $14.6 million for Q1 of the prior year. Comparing Q1 year-over-year, operating expenses grew 2.3% while revenue grew 31%. Total headcount at the end of Q1 2014 was 457 compared to 444 at the end of the previous quarter, with about 340 employees dedicated to engineering. Approximately 76% of our total headcount is located in Asia, primarily in Taiwan and China. Non-GAAP net income for Q1 2014 was $6.2 million or $0.21 per diluted ordinary share, compared with non-GAAP net income of $3.5 million or $0.11 per diluted ordinary share for the same period in previous year.

The non-GAAP effective tax rate in Q1 2014 was 9%. In Q1 2014, the non-GAAP earnings per ordinary share are based on $29.1 million diluted shares as compared to $9 million diluted shares in Q1 of 2013. The company is required to apply the two-class method to calculate earnings per ordinary share. In periods prior to the IPO, the two-class method allocates a portion of our earnings to preferred stock as well as eliminates the preferred shares from the outstanding share count prior to computing basic and diluted earnings per ordinary share. This accounting treatment makes it difficult to compare our reported EPS in periods where preferred shares were outstanding for all or a portion of the period as in Q1 of the previous year. For fiscal 2014 and beyond quarterly EPS will we computed on the basis consistent with that used in the fourth quarter of 2013.

We ended Q1 with cash of $104.3 million, adding $3.3 million of cash from operations in the quarter. Total accounts receivable at the end of Q1, 2014 were $23.5 million or about 62 days sales outstanding. This compares to accounts receivable of $20.2 million or 59 days sales outstanding in the prior quarter. Net inventory at the end of Q1 was $9.3 million, up from $8.9 million at the end of Q4. Accounts receivable and inventory remained in line with the company targets.

I will now like to discuss the outlook for Q2 of fiscal year 2014. We expect revenues for second quarter ending July 31, 2013 to be between $34.5 million and $37.5 million. This represents an increase of between 23% and 34% over Q2 of last year. Q2 camera revenues are estimated to be between 88% and 92% of total revenue for the quarter as compared to 77% in the same period in the prior year. Q2 revenues are being positively impacted by the growth of our primary cameras market with especially strong growth expected in the consumer and professional IP security market. There are a number of projected product launches by customers in the quarter, so due to the uncertain timing of the launches the revenue range presented is wider than my normal guidance.

Infrastructure revenues in Q2 of the prior year were unusually high due to the release of approximately $1.5 million in deferred revenue resulting from the renegotiation of another customer contract. As I mentioned, infrastructure business is experiencing lower demand that appears to the be the result of macro-market conditions, primarily in the U.S. and Europe. Also one large customer experienced uncertainty in its business as a result of a recent sale of the company.

As we have discussed, the change in mix between camera and infrastructure revenues may impact gross margins. Therefore, we estimate Q2 non-GAAP gross margins to be between 61% and 63%, compared to 64% in the preceding quarter and 69.2% in the same period in the prior year. The sequential decline in gross margin is primarily the result of decline in infrastructure revenues as a percent of total revenue, and to a lesser extent a decline in camera margins resulting from higher mix of consumer IP security cameras. Let me remind you that the release of the $1.5 million of deferred infrastructure revenue in Q2 of the previous year contributed to unusually high infrastructure revenues compared to camera revenues, which led to the high gross margins in that quarter.

We expect non-GAAP net income for the quarter to be between $5 million and $6.5 million. We forecast that operating expenses will increase by approximately $1 million in Q2 as compared to Q1, reflecting increased cost associated with the amortization of NRE expense of our chip development program and to a lesser extent our budgeted headcount increases. We are using an estimated non-GAAP annualized effective tax rate of 10% for net income amounts. In summary, our Q1 revenues, gross margins and profitability remain strong as our business continues to benefit from expansion in our core markets and what we believe is a strong competitive position of our product offerings. And finally, Fermi and I would like to thank all our employees worldwide for their hard work and contribution to our continuing success.

Operator, we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Joe Moore with Morgan Stanley. Please go ahead your line is now open.

Joe Moore - Morgan Stanley

The infrastructure business being weak and you talked about some of the reasons. What do you think -- do you think this is a temporary situation where it's sort of weighed down by some of the issues that you mentioned and there will be a rebound, or do you think we stay at this lower level and I have a follow up.

George Laplante

This is George. I think the visibility is not great right now for our customers so it's difficult to say where the market is heading and what opportunities they are looking at. But for now, the company is taking a conservative approach to their numbers and we are constantly discussing whether they are growing. But we feel that because of the lack of visibility we will take a conservative position.

Joe Moore - Morgan Stanley

Okay. And it looks like, your gross margins have been pretty good considering that mix. Is the gross margins on the camera side? Is this kind of a level that you expect over the long haul or do you think that -- are you seeing some temporary mix benefits there that we should be cognizant of?

George Laplante

Well, I think over the long haul I would not, at this point, make any changes to what I consider my target model which I have said [60%] to 63%. So we are still comfortable with that target model even with the current mix between camera and infrastructure revenues.

Operator

Our next question will come from the line of Quinn Bolton with Needham & Company. Please go ahead your line is open.

Quinn Bolton - Needham & Company

Congratulations on the strong results and guidance. I wanted to touch base first on the professional IP camera market. It sounds like you have not only had a number of designs wins, a lot of those design [search] come into production in the July quarter. Can you give us some sense, are these more HD cameras based on the A5s SoC or are these some of the new 4K by 2K cameras based on S2. And then to the extent that they are based on a 4K by 2K solution, does that give you better margins or are the margins between that HD and the 4K cameras relatively similar.

Fermi Wang

This is Fermi. I think all of the cameras, IP streaming cameras we are going to produce in this quarter, even for later this year, are all going to be A5s based camera. We don’t expect any S2 based camera we are going to launch in this year. And the gross margin for A5s camera vary based on the feature set. So for the higher end professional camera, our gross margin is still maintained but at the same time we are also continuing to compete in the consumer level at the security camera where the gross margin is lower.

Quinn Bolton - Needham & Company

And then jus switching gears to the sports camera market. It seems like you are seeing a little bit of atypical seasonality this year where you are seeing strength in April and it sounds like sports cameras continue to be strong here in July. I guess as you look into the second half of the year, since GoPro sort of refreshed the product line at the end of calendar 2012, do you think that that potentially limits the normal seasonal pattern that you would typically see in the October quarter or do you expect another refresh of wearable cameras to drive typically seasonality in the October quarter. I know you are not guiding there yet but I just wonder whether seasonality is a little different this year than normal years.

George Laplante

This is George. I think because the seasonality is driven really by the holiday season, we did have a strong initial part of the year because of product launches. But we still see the holiday season as giving us our normal Q3 sort of product build cycle.

Operator

Our next question will come from the line of Ross Seymore with Deutsche Bank. Please go ahead, your line is now open.

Ross Seymore - Deutsche Bank

George, just a question on the guide going forward, specifically on the gross margin side of things. It looks like even if I adjust for the mix, that the gross margin is being modeled to come down relatively decently in either your camera or your infrastructure side of things. Can you talk about what the gross margins are doing within each of those segments that is above and beyond the kind of big segment mix.

George Laplante

Yeah. If you look at the infrastructure business, those gross margins aren’t really changing much. But in the camera space as I mentioned in my script, the consumer IP security side of the business is growing and expected to grow in Q2 which is bringing down the overall camera margins side.

Ross Seymore - Deutsche Bank

Okay. And there is nothing beyond that, you are not having to price more aggressively due to competitive pressures or anything along those lines?

George Laplante

Well, it's a consumer side of the business so there is more price pressure and we probably have a little bit of a different ASP in there giving us a little bit lower margin on the consumer side.

Ross Seymore - Deutsche Bank

And then I guess on the automotive side, you mentioned that the dash cam continuing to be strong. Is that already the A7L-A that’s starting to ramp that you launched back at CES, or is that some of the prior generation still going.

Fermi Wang

For that quarter and in the Q2 I believe majority of our revenue comes from A5S and older generation. We believe that A7L-A will start ramping up later this year.

Ross Seymore - Deutsche Bank

And as those new products launch, if I recall right, sometimes they carry at initial launch lower gross margins until you get the volumes up. Is that something within auto but across the board that we need to be concerned about as far as the gross margin implications as we go into the back half of this year.

George Laplante

Probably no. In this case, because of the feature sets and the product offering we are giving there, we expect to maintain good gross margins in the initial periods.

Ross Seymore - Deutsche Bank

And I guess, this is my last question, if I am doing the math right, it appears that you are guiding the infrastructure segment down almost 25% sequentially but year-over-year it's about the same decline as you had in the first quarter. I know you talk about macro being weak but it seem like there is something more than that going on when you are down as much as you are year-over-year. Can you give us any confidence or any additional in when that might rebound or if there is product cycles and refreshes that would come in to get that business back up to the $6 million $7 million a quarter, like it was last year.

Fermi Wang

Well, there is a couple of things. First of all, we mentioned that one of the customers, because the company got sold, so we lost the visibility there for a short period of time and I think they are also trying to get back to their business as usual. But I think that’s one of the reasons you see this 25% guidance down. But I think for a long-term although we don’t have enough visibility for the traditional broadcasting encoder business, but we do believe that the transcoders continue to grow. And in addition to that, with AmbaCast 8000, we are going to get into the contribution system markets and that’s a first time for us and that’s also a good gross margin business for us long term. In the long run I think the transcoder and the contributing systems will help us to gain our revenue back.

Operator

(Operator Instructions) Our next question will come from the line of Kevin Cassidy with Stifel Nicolaus. Please go ahead.

Unidentified Analyst

This is [Dean Grunlows] calling in for Kevin. I was hoping you could add some color on the growth in the IP security space. Is this going to -- market migrate towards ultra-HD or higher precision video in your mind? And if you so, over what timeframe?

Fermi Wang

First of all, I think, like I said, for this year majority growth will still come from the full HD or 1080p 30. And we have a seen a lot of design activity around those resolution and the new customers come in. Like I have said that the (inaudible), they are all going to contribute to our top line and bottom line. For the 4K resolution, we do see that in the market trend start picking up and we have a design win there. But I don’t expect any significant revenue this year from 4K resolution video.

Unidentified Analyst

Then as a follow-up, in this kind of product, do you see that you have a value add in image processing or some end-to-end capabilities or how would you describe your differentiation in both the consumer and professional security market.

Fermi Wang

I think for the professional security camera, the things most important is really that the image quality and resolution. For example, we can support 4K and now our competitors have spend on the chip to do that, which really helped us to win design. Because when people want to design new products they want to make sure that we have a road map to cover not only the too low end but also [cross support] for the high end. So that we have a better image quality and a road map. But more importantly power consumption continues to play a very big role in the IP security more because more and more people look the professional system and the form factor to become small and the power consumption becomes more and more important. And so that on a professional side, although the form factor is bigger but that we have much lower power consumption than our competitors, still a huge advantage of ours.

On the consumer side because of the limits by the Wi-Fi connectivity at home, the compression efficiency and the video quality, and the power consumption, all those three things are the key differentiators for us versus our competitors. We continue to see that because of that we are leading on the quality, the compression efficiency and the power consumption, help us to secure design wins.

Unidentified Analyst

Is there an opportunity to do any additional analytics for these markets?

Fermi Wang

Absolutely. We believe that in the long run video capture device, certainly in capturing video is not good enough. So we need to starting video and (inaudible) to upload those functions on the server side so that you can do a much faster and a better way these analytics for the user kind applications. And I think for the -- this is particularly important for the security camera as well as for automotive markets.

Operator

And we do have a follow-up question from Quinn Bolton with Needham & Company. Please go ahead, your line is open.

Quinn Bolton - Needham & Company

Just a couple of quick follow-ups. George, can you give us some sense where you think the share count fall out for the July quarter?

George Laplante

Yeah, I can. I think $29.8 million for Q2.

Quinn Bolton - Needham & Company

Okay, great. And then just for Fermi, the AmbaCast 8000 platform, is that sort of fiscal '15 introduction or product based on that? Really starts to ship next year rather than this year.

Fermi Wang

Well, for example our customer Harmonic [assembled] that platform at NAB and we believe the significant revenue will come in early next year.

Quinn Bolton - Needham & Company

And then could you give us any update on how the design activity is going on the consumer side for the new A9 SoC that was introduced at CES?

Fermi Wang

Yes. That is targeting more on the sports camera side and we do have design wins but we are working, again, I think that those products will not come until early next year.

Operator

And we do have another follow-up question and it will come from Ross Seymore with Deutsche Bank. Please go ahead, your line is open.

Ross Seymore - Deutsche Bank

Quinn just beat me to the punch on it so I am all set. Thank you.

Operator

(Operator Instructions) And presenters at this time I am showing no additional questions in the phone queue. I would like to turn the program over to management for any additional or closing remarks.

Fermi Wang

Thank you. I would like to again thank our employees worldwide for their dedication to making this a world class company and thanks to all of you for joining us today. Thanks.

Operator

Thank you. Again, ladies and gentlemen this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect.