3 Things to Watch for When Ambarella Reports on Thursday

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Ambarella (NASDAQ: AMBA  ) , a semiconductor company that develops chips that go into high-definition cameras, has seen its shares skyrocket a whopping 460% since going public in late 2012. The company has benefited immensely from the smash-successes of some of its key customers, like wearable camera maker GoPro (NASDAQ: GPRO  ) .

With the company set to report earnings on Thursday, Sept. 4, here are three things that investors should watch when the results come in. 

Keep an eye on margins
On Ambarella's most recent earnings call, analyst Cody Acree asked management about how increased competition from Chinese chip makers would impact Ambarella's growth in China along with its gross margin.

The reason that this question is significant is that Ambarella currently enjoys a very robust gross margin profile, regularly clocking in north of 60%. If competitive pressures intensify and the company can't stay sufficiently ahead, then the company could risk losing either market share or seeing margins compress.

AMBA Gross Profit Margin (Quarterly) Chart

AMBA Gross Profit Margin (Quarterly) data by YCharts

Ambarella's CEO, Fermi Wang, pointed out on the that one major competitor in China is HiSilion, Huawei's chip development arm. Wang described HiSilicon as being "very aggressive on the pricing side."

Wang outlined the following strategy with respect to preserving its competitive positioning and margins:

  1. More features, more performance. Wang stated that the first part of Ambarella's strategy to fight off competition like HiSilicon is to simply introduce more feature-rich and higher performance parts in a bid to grab as much share of the high-end of the market as possible.
  2. Fight at the low end on price. Wang also indicated that the company is willing to compete at the low-end on price, with the expectation that if it can win significant portions of the high-end market, this should all blend to a favorable overall gross margin profile.

Additionally, Ambarella CFO George Laplante remarked on the last earnings call that gross margin in the company's most recent quarter dropped year-over-year from 64% to 62.5% as a result of "an increase in mix of product revenue from lower end China IP security camera manufacturers."

However, Wang appeared confident that the company could maintain a long-term gross margin profile of 60-63%. Investors should keep tabs on the trend in gross margin going forward to make sure Ambarella stays roughly in that range. 

Life outside of GoPro
Stifel Nicolaus' Kevin Cassidy estimates that roughly 25% of Ambarella's revenue base comes from GoPro. While this still looks like a robust growth opportunity, investors should also watch how Ambarella's non-GoPro opportunities materialize, particularly as the GoPro growth train can't last indefinitely. 

As Rule Breakers' David Meier wrote in his latest update on the company, Ambarella's CEO Fermi Wang highlighted a potential opportunity in unmanned aerial vehicles (UAVs) for its chips. While the size of the opportunity for Ambarella is unclear, look for management to provide further details on the potential size of this opportunity and the progress the company is making in capturing it.

It's also important to watch Ambarella's "core" businesses. For example, Wang pointed out that the consumer security camera market, which appears to leverage the same technology as is used in the professional security camera market, looks like a compelling growth opportunity. 

Progress on 14-nanometer?
Ambarella spent a good amount of time on the last call talking about how it planned to begin designing its first processor using a 14-nanometer manufacturing technology. This is noteworthy in that Ambarella cites its adoption of the latest-and-greatest manufacturing technologies as a competitive advantage.

The bad news is that designing chips on this new 14-nanometer technology is quite difficult and, according to Ambarella's management, expensive. This is why management has signaled to investors to expect those development costs to start showing up through the rest of this year and into 2015. In the short term, this could impact profitability.

However, if Ambarella can get a clear lead over its competitors in getting 14-nanometer products to market, it will not only likely be able to offer better-performing products, but lower-power ones, too -- strengthening its competitive positioning over the long-run. 

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9/19/2014 4:00 PM
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