What happened

Shares of Ambarella Inc. (NASDAQ:AMBA) were down 21.2% as of 11:30 a.m. EDT Friday after the video processing chip company announced solid fiscal second-quarter 2018 results, but reduced its full-year revenue outlook.

Ambarella's revenue for the quarter climbed 10% year over year to $71.6 million, driven by growth from the IP security and OEM automotive markets, while adjusted gross margin fell 410 basis points year over year to 63%. Both figures compared favorably to Ambarella's latest guidance, which called for revenue of $69 million to $72 million and adjusted gross margin of between 62% and 63.5%.

On the bottom line, that translated to adjusted net income of $16.5 million, or $0.48 per share, which was down from $0.54 per share in last year's fiscal Q2, but $0.04 above consensus estimates.

Ambarella's A9SE-A1-RH and A-125-A2-RH flying camera SOCs

Image source: Ambarella.

So what

Ambarella stock initially climbed in yesterday's after-hours trading following the earnings release. But during the subsequent conference call, Ambarella management reduced its full-year fiscal 2018 outlook to call for revenue to be down 3% to 7% from last year, compared to previous guidance for for revenue to be flat, plus or minus 3%.

Ambarella CFO George Laplante explained that revenue will likely be impacted by the introduction of new lower-priced drones, which hurts Ambarella's sales into the premium drone segment, as well as continued headwinds from Tier 2 drone customers. To a lesser extent, Ambarella is also seeing slower-than-anticipated sales into the virtual reality market. And finally, the company is concerned over a shortage of certain memory components that could impact camera build schedules for its customers -- a situation reminiscent of last year's image sensor shortage caused by the 2016 earthquake in Japan.

Now what

Ambarella has a history of underpromising out of an abundance of caution. And the company did note that better-than-expected sales to GoPro -- where high inventories have held back growth in recent quarters -- should help partially offset the aforementioned headwinds in the second half. But the market hates uncertainty, so regardless of whether Ambarella's caution proves to have merit, it's no surprise to see shares dropping today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.