Shares of Ambarella (NASDAQ:AMBA) are down around 7% on the heels of its fiscal third-quarter 2017 report last week, but not because of the video processing chip specialist's actual results. Revenue was above Ambarella's guidance, and it enjoyed broad-based growth across its IP security, home monitoring, and automotive markets. Ambarella also saw a ramp in revenue from wearables, which had consistently held back overall growth in recent quarters.
To understand why shares fell, and for a better grasp of what's driving Ambarella's business and where it expects to go from here, investors would be wise to turn to its subsequent earnings conference call. Here are five important points Ambarella management discussed during this quarter's call.
1. A promising new opportunity
Looking forward, we see significant opportunities for computer vision technology across multiple markets, including drone, IP security camera and automotive camera. Ambarella is continuing to invest heavily in computer vision development building upon the pioneering computer vision and autonomous vehicle award done by our combined Ambarella and the VisLab teams. We remain on track to ship our first computer vision chip in the beginning of next year. -- Ambarella CEO Fermi Wang
Recall that Ambarella quietly acquired automotive vision specialist VisLab for $30 million in mid-2015. And in Ambarella's fiscal second-quarter report just over a year ago, Wang noted the acquisition added both a strong development team and advanced intellectual property in computer vision technology. VisLab was -- and still is -- primarily known for its cutting-edge autonomous vehicle technology, with one early prototype vehicle even completing a 15,000 km test drive from Parma to Shanghai in 2010.
But based on Wang's latest comments, it's clear Ambarella has even bigger plans to both commercialize VisLab's automotive technology and expand it to other fast-growing markets. Investors should watch closely, then, to gauge customers' receptions of Ambarella's first computer vision chip in early calendar 2017.
2. Automotive continues to gain momentum
In the automotive video camera business we are seeing accelerating production of dash camera video recorders by car manufacturers. Automotive OEMs are responding to continuing interest in Asia and Eastern Europe, and they're now offering OEM branded video recorders for both original equipment and dealership options. -- Fermi Wang
I've previously discussed Mr. Wang's similar comments in September on traction in the automotive market. But Wang also suggested at the time that, while his company had begun shipping SoCs for some European OEM models, most of their new opportunities were still in China.
But now Ambarella is benefiting from European regulations that require all new vehicles be equipped with cameras for incident recording starting in April, 2018. And manufacturers like Mercedes Benz are getting a jump on those regulations, providing new integrated systems featuring Ambarella-based HD cameras for this purpose. In addition, Japanese auto juggernaut Toyota last quarter also launched a family of dealer option drive recorders based on Ambarella SOCs.
3. Drone delays hurt growth
The drone market was down both year over year and sequentially primarily due to the timing of product launches as manufacturers continued to incur delays in the launch of new products or incurred production issues causing a barrier to meet market demand. -- Ambarella CFO George Laplante
To be fair, Ambarella did describe "strong design win momentum" in the drone market this quarter, including a full range of new models featuring Ambarella SOCs from Chinese drone market leader DJI.
But Laplante's comments above are clearly a reference to GoPro's (NASDAQ:GPRO) bungled launch of its new Karma drone. Putting aside the fact we now know Ambarella's flying camera SOCs found a home in Karma, GoPro originally intended to launch Karma in the first half of this year, but ended up delaying that launch in May to fine-tune its differentiating features. Then, just two weeks after Karma finally hit store shelves in late October, GoPro recalled all Karma units it had sold after a very small number of users reported incidents of power failure during flight.
GoPro still hasn't resolved the recall, and there appears to be a very real chance Karma will miss the lucrative holiday shopping season entirely. If that turns out to be the case, and if other drone makers can't pick up the slack, Ambarella's drone segment will likely continue to suffer.
4. The Sony supply shortage is (still) waning
The impact of the CMOS sensor shortage in Q three was in line with our expectations with $2 to $3 million of revenue either lost or delayed. We now expect the shortage to continue but at a slowing pace in Q4 for certain sensors, with the impact primarily affecting new product launches by customers.-- George Laplante
Ambarella was indirectly hurt earlier this year by an earthquake in Japan, which temporarily forced Sony (NYSE: SNE) to halt production at a factory that produces image sensors used in non-cell-phone video-capture devices. Because Ambarella estimated as much as 48% of its revenue over the next several quarters depended on its customers' abilities to acquire adequate inventory of those sensors, it anticipated several quarters of lost or delayed revenue from this shortage as Sony gradually resumed full production. As it stands, it's no surprise that Ambarella continues to feel the impact of this situation, and investors should be encouraged the shortage continues to abate.
5. Why guidance was disappointing
Although we expect to return to growth for the full year of fiscal year '18, our current visibility of Ambarella inventory levels held at our primary consumer product customers indicates there is a potential for a negative impact to revenue in the early part of fiscal year '18. Whether we realize such an impact, and the scope of any impact, will largely depend upon the holiday sell-through in these markets. Once we have a better understanding of the holiday sell-through and the related impact on our customer year-end inventory levels of our chips, we can be more specific in our annual guidance for next year. I anticipate providing a more detailed outlook on our year-end earnings call. -- George Laplante
Here again, Laplante's "primary consumer product" customer reference is primarily to GoPro. Considering chips dedicated to GoPro cameras previously comprised as much as 30% of Ambarella's total revenue, then plunged to the low-single-digit range early this year as demand for GoPro's aging product line began to decline, it's hard to blame Ambarella for taking a more cautious approach to forecasting a sustained return to growth from the wearable-camera segment.
Then again, GoPro also announced last week that its new HERO5 cameras have enjoyed strong holiday sales to date. If GoPro is able to sustain that strength through the duration of the holiday season, it would not only ease the concerns of Ambarella investors over the rebound of the formerly core wearables segment, but also lessen the sting of Karma's early failure to launch.