Ambarella Inc. Earnings Put the Company on Pace for Another Annual Sales Decline

Two women take a selfie with a sports camera.

Camera technology specialist Ambarella (NASDAQ: AMBA) posted second-quarter earnings results this week that edged past management's forecast. The company lowered its 2017 growth guidance, though, because of surprising softness in a few of its key semiconductor markets.

More on that falling outlook in a moment. First, let's take a closer look at the latest results.

Sales and profits

Revenue improved by 10% to $72 million, putting the company near the high end of the sales range that CEO Fermi Wang and his executive team issued back in June. As expected, Ambarella lost ground in its sales to GoPro (NASDAQ: GPRO) , which remains one of its biggest customers . Sales in the drone market posted a surprising decline, too. However, healthy demand in the IP security camera helped offset those weaknesses.

Overall, Ambarella made modest progress in its goal of diversifying away from the GoPro-focused sports camera market even if a few segments -- particularly drones -- aren't performing as well as executives had hoped.

The semiconductor designer's profit margin slumped to 63% of sales from 67% a year ago even as operating expenses jumped. Those trends combined to push operating income down 40% to $5.5 million. Ambarella's bottom line fell harder thanks to a bump in tax expenses. Net income dove by 62% to $3.3 million.

The slipping gross profit margin wasn't a surprise. After all, Ambarella's sports camera market is its most lucrative, and as sales shift away from that division and toward segments like home and office security, profitability is destined to fall.

Looking ahead

Wang and his team are excited about Amberalla's potential as a key tech designer in the automotive industry. Its technology supports products including camera-enhanced mirrors that provide surround views and high-definition recorders. "The biggest opportunity for us in the future on the [total addressable market] point of view," he said in a conference call with investors, "is really automotive."

Ambarella is also pouring resources into the computer vision field, where they believe they'll win a competitive advantage thanks to a newly designed chip. In development for four years, their computer vision processor is set to be unveiled at the consumer electronics show in January and should mark the first entry in a long line of chips aimed at supporting this emerging industry.

Those promising but risky long-run opportunities won't do much to help Ambarella's business in the months ahead, though. In fact, the company sees several negative trends harming its growth this year, including a contraction in the drone segment and slow growth in the emerging virtual reality niche. There's also new concern that a few major camera manufacturers will pull back their production schedules later in the year due to memory component shortages.

As a result, Ambarella now sees revenue falling by 5% at the midpoint of guidance, compared to the prior forecast of roughly flat sales. The good news is the company is likely to post a bigger gain in GoPro revenue during the second half of the year, so profit margin should improve. However, the overall forecast implies a second straight year of declining sales for a company that enjoyed 48% growth as recently as 2015

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy .

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

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

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