Image source: Ambarella Inc.

Ambarella Inc. (AMBA -0.76%) is set to release fiscal second-quarter 2017 results this Thursday, Sept. 1, after the market closes. With shares of Ambarella up an incredible 70% over the past three months as of this writing following last quarter's impressive beat, you can be sure the market will be watching closely when the video processing chip specialist's report hits the wires. Now is a great time, then, for investors to start thinking about what to expect.

Ambarella's headline numbers

First, though management stated that design win activity last quarter was strong across all market segments, note that Ambarella's guidance calls for fiscal Q2 revenue between $60 million and $66 million, the midpoint of which represents a year-over-year decline of roughly 25%, with adjusted gross margin between 60.5% and 63.5%.

To blame for its expected top-line declines are a combination of expected continuing weakness in the wearable camera market -- which previously represented as much as 30% of Ambarella's revenue -- and supply shortages of Sony image sensors related to the April earthquake in Kumamoto, Japan.

Regarding the latter, management cautioned that the Sony disruption affects its customers' ability to build cameras and is likely to result in uncertainty regarding the timing and scope of demand for Ambarella chips over the next several quarters. 

Digging deeper

To that end, longtime Ambarella investors know the company bears an undeniable link as a primary supplier to action-camera specialist GoPro. And GoPro, for its part, only recently confirmed that both its new HERO5 series cameras and its new Karma drone are on track to be released in time for this year's lucrative holiday season -- something GoPro CEO Nick Woodman said would "contribute to the largest introduction of products in our history."

If Ambarella's drone-centric systems-on-a-chip (SOCs) have found a home inside Karma, and assuming GoPro hasn't switched its HERO5 devices to a competing video processing chip solution (as some investors have feared in recent months), it seems safe to assume Ambarella should be gearing up for a much healthier second half.

But that will also depend partly on the relative health of Ambarella's supplementary drone, automotive, and IP security businesses, all of which the company insisted last quarter delivered growth consistent with expectations as its core wearable markets waned. We should also listen for color on the performance of younger emerging segments such as virtual reality, where Ambarella's SoCs have enjoyed solid design win momentum, as they're ideally suited to camera systems that require high-quality motion capture to ensure a more immersive VR experience.

Next, speaking to the aforementioned investor fears, Ambarella management also typically offers updates on the competitive landscape, in particular as it relates to the progress of key competitors such as HiSilicon and Qualcomm in muscling their ways into market segments Ambarella previously dominated. Fortunately for Ambarella, given its relative position of strength, management has insisted for the past several quarters that the landscape hasn't seen any significant changes for the worse. Ambarella is aware, however, that competitors are speaking to its key customers. But it also remains confident that its focus on innovation will keep the company firmly positioned at the forefront of video processing chips. 

Looking forward

Finally, listen for Ambarella to give a glimpse of what to expect in the coming quarter, as well as for any revisions to Ambarella's full fiscal-year guidance.

For perspective, and though we don't pay close attention to Wall Street's demands, analysts' consensus estimates predict that Ambarella will deliver fiscal third-quarter earnings of $0.85 per share, down from $1.08 per share in last year's fiscal Q3, and revenue of $94.1 million, marking a return to growth from $93.2 million in the same year-ago period. For the full year, Ambarella's current guidance calls for fiscal 2017 revenue to be flat to down 5% year over year.

In short, Ambarella has done an admirable job weathering the decline of its formerly core wearable market so far. But going forward, it's obvious that investors have high hopes that the worst is behind the company now. In the end, whether Ambarella confirms as much remains to be seen, but something tells me we'll be in for a wild week.