Ambarella Is Still Bleeding, but It's Making Progress in Computer Vision

Shares of video-processing and computer-vision chipmaker Ambarella (AMBA -1.30%) fell by double-digit percentages after the company reported another quarter of declining sales after the markets closed on Thursday. While the pain in its fiscal second-quarter 2019 report wasn't as bad as some analysts had feared, the company's outlook for the third quarter indicated that shareholders will likely have to wait until next year for a rebound.

Second-quarter 2019 numbers

Data source: Ambarella Inc. P.p. = percentage points. N/A = not applicable; difference too great for meaningful comparison. 

Revenue fell in the quarter, which ended July 31, as declines in consumer products sales -- specifically drones, action cameras, and virtual-reality devices -- offset strength in the automotive and security camera industries. Ambarella has been working to wean itself off its reliance on the volatile consumer electronics segment ever since sales at former key partner GoPro (NASDAQ: GPRO) started to tank a couple years ago. After several other false starts in the drone and virtual-reality markets, the chipmaker is now doubling down on industrial and security applications with its new computer vision (CV) technology.

Development of those CV chips is still underway, and the company has therefore billed this as another year of transition. The only metrics that have been consistently on the rise are expenses, an expansion that can largely be chalked up to research and development costs. However, management has recently stated that Ambarella is close to monetizing its computer vision technology.

A bet on tech of tomorrow

The bad news is that consumer goods sales are expected to continue dropping through the rest of the year. As a result, fiscal Q3 revenue is expected to be in the $55.5 million to $58.5 million range, which would amount to a 34% to 38% year-over-year drop. That explains management's decision to shift gears and dump so much money into research and development for new markets.

Image source: Getty Images.

The good news is that, by year's end, consumer electronics will likely account for less than 20% of Ambarella's total revenue. With GoPro (which delivered about $38 million of Ambarella's revenue in 2017) and other declining consumer end-markets in the rearview mirror, fiscal 2020 could be the year Ambarella returns to growth. By then, its sales to the auto industry will be in the low 20% range of total sales while the security industry will provide about 60%, according to management's expectations.

Headwinds remain, however. Sales growth in auto industry applications is coming in at a slower pace than management anticipated due to a key manufacturer's delay in video chip production. And, while sales for home security products are still going strong, professional security sales have recently come in flat.

But there are signs things could get better. Home security sales in Europe could get a boost from Vodafone's new security system offering based on Samsung's SmartThings cameras, which use Ambarella chips. Demand from Chinese automakers is also strong as video recording capabilities have become a must-have for drivers in China.

Those computer vision chips can't arrive soon enough for Ambarella, though. CV chip revenues are expected to kick in during the first half of the company's fiscal 2020 year. Beyond security cameras (which will be the first source of sales) and autos (which will hit much later, as the CV tech gets applied to self-driving cars), management sees another outlet for its new product in industrial robotics. That offers hope that CV can be more than a one- or two-trick pony.

Despite the risks, the organization's leadership team is apparently confident in its strategy, as it has maintained its bet on Ambarella shares. The company repurchased about $45 million worth of its stock during the last quarter alone. Nevertheless, between now and next year, things could get worse for the chipmaker.