When Ambarella (NASDAQ:AMBA) released better-than-expected fiscal first-quarter 2017 results last Thursday, you could almost hear a collective sigh of relief from weary investors who've endured the video processing chip company's decline over the past year. Despite popping nearly 10% the day after the report, Ambarella stock is still down more than 50% over the past year as of this writing, including a 15% decline so far in calendar 2016.
With that in mind, Ambarella shareholders would be wise to dig deeper in an effort to understand what's driving its business right now -- and, perhaps most important, determine whether its recent momentum might continue. And arguably one of the best ways to do so is by reading through management's comments in the conference calls following each quarterly report.
As such, here are five of the most important points discussed during this quarter's call:
1. The Sony disruption will last several quarters
Design win activity was strong across all market segments with increasing adoption of Ambarella's new 4K and HEVC SoC solutions. As we look forward, however, we anticipate that disruption in the availability of Sony image sensors caused by the April 14 Kumamoto, Japan, earthquake has and will impact our customers' ability to build cameras. Ambarella is one of Sony's most significant camera SoC partners for non-cellphone application. And as a result, this will impact the timing and the scope of demand for our chips, over the next several quarters.
-- Ambarella CEO Fermi Wang
For perspective, the earthquake damaged the primary factory that produces Sony (NYSE:SONY) image sensors used in non-cell-phone video capture devices, which caused the facility to halt production. And because Ambarella estimates roughly 40% to 48% of its next two quarters' revenue depends on its customers' ability to acquire adequate inventory of Sony's sensors, Ambarella will feel the impact of this shortage in the coming quarters until Sony brings its facilities back to full production.
As such, Ambarella's revenue guidance -- which I noted in my full earnings recap technically fell short of analysts' expectations -- was expanded to account for projects at risk, and excludes potential revenue from projects already experiencing Sony sensor shortages.
2. The drone market is taking off
In the drone market, we are enjoying solid sales growth as well as a significant design win momentum. Volumes are increasing as strong price points continue to come down as the consumers demand high quality video recording and photography and professional users develop more vertical market commercial applications.
Thankfully, the rest of Ambarella's growth prospects remain firmly intact. In fact, Ambarella has previously stated that the drone market should represent around 20% of total revenue this fiscal year, and the contributions of flying cameras relative to Ambarella's total could grow even more given the Sony supply situation affecting other markets. Ambarella is also working hard to ensure that it maintains the industry's most comprehensive flying camera chip portfolio, demonstrating its new A12, A9SE, and H2 system-on-a-chip (SoC) flying camera solutions at Asia Consumer Electronics Show in Shanghai last quarter.
3. Virtual reality is becoming a catalyst
In addition to new product introduction in our existing markets, we're seeing interest in virtually reality or VR cameras, which are increasingly targeting semi-professional and consumer price points. The cameras typically enable full 360 degree video capture by combining images from multiple sensors.
Ambarella's roster of customers recently grew to indirectly include Alphabet parent Google, which announced a new partnership to incorporate Chinese camera maker Yi Technology's new 4K action camera into its Jump VR camera rig ecosystem. As it turns out, that new camera uses Ambarella's A9SE SoC. In addition, the A9SE SoC has found a home in Israel-based HumanEyes' new Vuze 3D 360 degree VR camera, which targets movie-producing consumers. And Ambarella's A12 SoC will be included in Chinese VR specialist Wushilan's new Insta360 Nano VR camera.
To be fair, these are all relatively early design wins in a relatively young industry. But as virtual reality technology continues to proliferate, investors can rest assured that Ambarella is working hard to ensure its technology plays a central role.
4. Wearables should recover soon
Setting aside the Sony sensor issue, from a market and customer standpoint, we continue to see growth consistent with our expectations in drone, home security, and auto aftermarket businesses. We expect to have some strengthening of the China IP security market in Q2 after the soft Q1. And we continue to see a recovery of the wearable market, so this will most likely be seen in second half of the year.
-- Ambarella CFO George Laplante
Considering Ambarella has directly blamed weakness in the wearable-camera segment for its underwhelming forward guidance for the better part of the past year, the expectation of a second-half recovery in the wearable segment seems to be the most welcome news investors received last week. In fact, once the Sony supply disruption is resolved and given the continued strength of its supplementary markets, including automotive, IP security, home monitoring, and flying cameras, it's not a stretch to say Ambarella could emerge the second half of this fiscal year as strong as it has ever been.
5. The competitive landscape hasn't changed
In terms of competition, I think in general, in the last three months, we don't see the competitive landscape changed at all. For HiSilicon, we still that it's our major competitor in IP camera. And the one thing we did is after we introduced our S3L and S3LM HEVC solution, we have a lot of design win momentum, and that's why we believe that we have a strong HEVC roadmap for our customer for IP security camera now. [T]he Qualcomm competitive landscape didn't change that much either, although they continue to try to approach our customer on the drone side, but I think they still either focus on the high end drone products like control [function] portion, not a video portion or for a low end drone, they try to do a total solution. But, in our current latest roadmap to our customer, [...] we show A12 and A9ES and H2 could cover on low end, to mid-end, to high end. We have a complete roadmap to grow against our competitors.
Finally, following last quarter's report, I argued that rising competition represents the single greatest threat to Ambarella's long-term success. After all, Ambarella admitted that it was facing pressure from not only high-volume, low-priced chip providers from China and Taiwan, but also from industry-leading juggernauts such as Qualcomm (NASDAQ:QCOM), which recently began to ramp up efforts to compete with Ambarella in both its core camera solutions and drone segments.
According to Wang, however, Ambarella remains far ahead of the competition in camera solutions in terms of video quality, compression efficiency, power consumption, video features, and overall performance. And on the drone side, Wang noted that Qualcomm was primarily trying to replace an inexpensive microcontroller for flight control functions, rather than on the camera SoC side, where Ambarella primarily operates. And even when Qualcomm decides to muscle its way into Ambarella's camera SoC turf in drones, Ambarella remains well positioned given its innovative roots and deep product portfolio. Investors should be pleased, then, knowing little has changed for Ambarella in terms of competition over the past quarter.