Ambarella Inc. (NASDAQ:AMBA) released strong fiscal second-quarter 2018 results on Thursday after the market closed, with both revenue and adjusted gross margin arriving above the midpoints of the company's latest guidance. And while Ambarella also offered better-than-expected guidance for the fiscal third quarter, it simultaneously reduced its outlook for the full year.

So after initially climbing as much as 3%, shares of the video processing chip specialist plunged in after-hours trading. Let's take a closer look at what Ambarella accomplished over the past few months, as well as what investors can expect from the company going forward.

Man playing with quadcopter drone in a park

Affordable drones are crimping growth in the premium drone market for Ambarella. Image source: Getty Images.

Ambarella results: The raw numbers

Metric

Fiscal Q2 2018

Fiscal Q2 2017

Year-Over-Year Growth

Revenue

$71.6 million

$65.1 million

10%

GAAP net income

$3.3 million

$8.6 million

(61.6%)

GAAP earnings per share

$0.10

$0.25

(60%)

Data source: Ambarella, Inc.  

What happened with Ambarella this quarter?

  • Adjusted (non-GAAP) gross margin was 63%, down from 67.1% in the same year-ago period.
  • For perspective, these results were above the midpoints of Ambarella's guidance provided last quarter, which called for revenue between $69 million and $72 million and adjusted gross margin of between 62% and 63.5%.
  • Adjusted net income -- which adds perspective by excluding stock-based compensation -- was $16.5 million, or $0.48 per share, down from $18.5 million, or $0.54 per share in the same year-ago period, but also well above the $0.44 per share expected by the market.
  • Repurchased 595,770 shares during the quarter for $29.9 million, including 44,419 shares for $2.2 million under Ambarella's incremental $50 million program approved last quarter.
  • Noting high inventories at GoPro have constrained growth for the past few quarters, non-GoPro revenue this quarter climbed 16.3% year over year to $67.9 million, driven by the IP security and automotive camera markets. 
  • Ambarella continued to see declines in shipments for the drone market, driven by both timing of new product launches and ongoing weakness from Tier 2 drone customers.
  • Ambarella received the first silicon samples of its inaugural computer vision chip, dubbed "CV1," in May, and completed its initial software bring-up. CV1 will be sampled at leading customers starting in the fiscal fourth quarter of this year, including a software development kit enabling customized algorithms.

What management had to say

Ambarella CEO Fermi Wang stated:

During the second quarter, we had solid growth from IP security, both from professional and home monitoring camera markets. We also continued to see growth in our OEM auto business, with strong design win activity and revenue from OEM auto video recorders. We continue to invest in the technologies required to deliver future generations of highly intelligent, HD and Ultra HD cameras with particular emphasis on high performance computer vision functionality. We see computer vision as a key differentiator for us in camera markets, including automotive, IP security, drones and robotics, and it is our key area of focus for the future.

Looking forward 

For the current fiscal third quarter, Ambarella expects revenue of between $87.5 million and $90.5 million, representing a year-over-year drop of between 12.9% and 10%, but roughly in line with consensus estimates. This range also assumes growth in non-GoPro revenue of between 4.9% and 9.4%. Trending toward the bottom line, Ambarella expects fiscal third-quarter adjusted gross margin to remain steady at between 62% and 63.5%. 

During the subsequent conference call, however, Ambarella management stated it now expects full fiscal-year 2018 revenue to be down 3% to 7% from the prior year, representing a reduction from their previous forecast for revenue to be roughly flat from last fiscal year, plus or minus 3%.

According to CFO George Laplante, the blame for that reduction lies with a combination of lower-priced drones impacting the premium drone segment, continued weakness from Tier 2 drone customers, lower-than-expected growth from the newer virtual reality market, and a recent shortage of certain memory components that could impact camera build schedules for certain customers. Incidentally, Laplante added the latter culprit will be partially offset by higher-than-anticipated revenue from GoPro in the second half. But all told, non-GoPro revenue growth for the year is now expected to be a modest 9% to 12%.

In the end, these impending challenges were more than enough to offset Ambarella's largely positive fiscal second quarter, and it's no surprise to see the stock pulling back in response.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ambarella and GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.