Shares of video processing specialist Ambarella (NASDAQ:AMBA) surged in the June 3 trading session after reporting earnings. The company's results for the most recent quarter were a bit better than expected and although guidance fell slightly short of market expectations (guidance of between $60 and $66 million, against consensus of $69 million), the company had a good explanation for the shortfall.
Let's take a closer look at what's going on.
Earthquake rattles Ambarella's business
Ambarella makes video processing chips, and these chips are generally used inside of devices that have cameras with which to capture videos. Although Ambarella makes the brains that can process captured video, it doesn't produce the sensors that cameras use to capture that video.
The leading vendor of such sensors, typically known as CMOS image sensors, is Sony (NYSE:SNE). There are other sensor makers as well, but Sony commands very significant share in this market. A disruption to Sony's image sensor production capability very often means a disruption to the businesses of Ambarella's customers, which is likely to impact Ambarella itself.
On the earnings call accompanying Ambarella's earnings release, CEO Fermi Wang said that the company anticipates that the "disruption in availability of Sony image sensors caused by the April 14th Kumamoto Japan earthquake has and will impact [Ambarella's] customers' ability to build cameras."
"Ambarella is one of Sony's most significant camera [system-on-a-chip] partners for non-cellphone application," Wang added. "And as a result, this will impact the timing and scope of demand for our chips over the next several quarters."
How this impacts Ambarella's business and financials
Ambarella CFO George Laplante took the time to explain the impact of the Sony image sensor production disruption on Ambarella's business.
"We estimate that approximately 40% to 48% of our total revenue in each of the next two quarters is dependent on acquiring adequate inventory at Sony sensors, but with the impact varying across both markets and customers," Laplante said.
The executive noted that Sony's facility isn't expected to be fully operational "until the end of August."
"Based on discussion with our customers, we understand that Sony will not be able to deliver 100% of our customers' demand, depending on the sensor model for the remainder of the year," Laplante added.
The bottom line for Ambarella, according to Laplante, is that this sensor shortage will have an impact on the company's results during the second and third quarters of the current fiscal year.
Total revenue outlook, then?
Laplante said on the call that Ambarella's drone, home security, and auto aftermarket businesses are growing in line with the company's expectations. For the full year, management now expects revenue in the range of down 5% to flat relative to the prior fiscal year.
Although the image sensor shortage is certainly not ideal, it's generally better to see a company fall short of expectations due to near-term, one-off events like an earthquake disrupting sensor supply than to see a fundamental drop in product demand.
Shortages are generally eventually resolved and by the end of Ambarella's fiscal year, and as a result, I expect investors to overlook the impact of the shortage.