Ambarella (NASDAQ:AMBA) released first-quarter results after market close June 2, delivering strong results that were better than the market's expectations. The average analyst estimate as polled by Thomson Reuters called for non-GAAP earnings of $0.59 a share, with actual results coming in at $0.71. Revenue of $71 million was also above expectations, with those in the the Reuters poll having estimated sales at $67.36 million.

Following the earnings report, Ambarella CEO Fermi Wang and CFO George Laplante participated in a conference call with analysts to discuss the quarter's results and outline the direction of the business. Here are five key takeaways from the call.

The security IP camera market is looking very strong
Along with chips for action cameras, chips sold for security cameras are Ambarella's core source of revenue, and that market is doing very well for the company. Laplante confirmed that the company's professional security IP camera sales have increased more than 100% year over year in the last two years, and the company has a number of new chips that will capitalize on the fantastic growth in the security segment.

Here's Wang outlining the security market and spotlighting key products:

At the April ISC U.S. Security Conference and Exposition, many of the world's leading camera makers demonstrated 4K or Ultra HD cameras based on Ambarella's H2 SoC. Ambarella also demonstrated its new H3 camera SoC, the first to support the new H.265 video standard at 4K or ultra HD resolution.

Also during the show, Ambarella announced availability of its H2LM-based battery-powered IP camera reference design. The reference design enables fast developments of a new generation of a small, high-quality, battery-powered, full HD security cameras, suitable for both professional and home monitoring security locations. The reference design enables cameras that can start recording full HD 1080p30 video in less than 0.5 seconds from wake-up, and provide up to six months of battery life.

Most of Ambarella's security sales come from the enterprise market; however, Wang anticipates big growth on the consumer side.

Drones are really taking off
One of the big positive surprises from Ambarella's conference call was just how rapidly the sales of drone cameras are growing. The chip maker saw a significant increase in drone chip sales during the first quarter, with its position in devices from market-leading drone maker DJI driving performance. The company anticipates that revenues from drone chips will exceed 10% of total sales in the current quarter, a first for Ambarella.

Wang indicated that DJI's production is starting to ramp up, and he also sees that occurring with other manufacturers. "We don't have any data, but I won't be surprised [to see] this market grow beyond 1 million units this year, easily," Wang said. 

DJI is propelling the drone market for Ambarella, and it will release two new camera drones this quarter, but the chip maker's customer base in this segment looks to become increasingly diverse over time, as has happened with action cameras.

GoPro putting up good numbers; Ambarella building action camera customer base
is a huge sales driver for Ambarella and accounts for roughly a third of the company's sales, but the company is also building sales to other action camera manufacturers.

Garmin's recently released VIRB X and VIRB XE cameras are built on Ambarella's chips, and Chinese cell phone maker Xiaomi's low-priced Yi camera is producing good numbers.

Here's what Wang had to say when asked about action camera sales and the outlook for the future:

In the past, GoPro was the majority of business, and I think with Xiaomi ramping up, I definitely think Xiaomi will start shipping very good volumes. And we like to see the sell-through number before we make a comment about your question, but I think for this particular quarter, we do see Xiaomi start to become a bigger percentage of our sports camera.

Ambarella anticipates strong performance in the second quarter
Ambarella just delivered a winner of a quarterly report, and it anticipates strong performance in the current period. The second quarter will see an unusually large number of new product launches, and the company expects revenue of between $79 million and $83 million, representing between 60% and 77% growth year over year. Here's Laplante on other targets:

We estimate Q2 non-GAAP gross margins to be between 63.5% and 65% compared to 64.8% in Q1 of this fiscal year, and 65.1% in Q2 of the prior year. Margin from camera products are expected to remain strong as increased sales in the lower-margin S2LM-based security business are offset by the increase in flying camera revenues and the continued transition to the A7L SoC in the auto after-market. We expect non-GAAP net income for the second quarter to be between $26 million and $28 million. We are using a estimated non-GAAP annualized effective tax rate of 9% for net income amounts.

Ambarella has a history of beating its targets, and its earnings have beaten the average analyst estimate by 35.6% over the last four quarters. Even exceeding its targets by a small margin would represent very impressive performance for the company.

Ambarella is looking to improve in data analytics, eyeing mergers and acquisitions
Wang and Laplante made frequent mention of a desire to improve the company's analytics strength in the call, with Wang indicating that hitting targets in this area was particularly important in the automotive segment.

Ambarella is up against stronger competition in automotive cameras than in its other markets, with its chief rival in the space being more resource-rich Mobileye, and improving analytics could allow the chip maker to capitalize on a wave of automotive Internet of Things technologies. The company is hiring to improve its analytics capabilities and also looking at acquisitions in this area. Here's Laplante:

We have said in the past that we are definitely interested in M&A activity, primarily around key areas like analytics, algorithm development. We continue to search for good opportunities. And yes, we would be open to using stock in one of those transactions. We also have significant cash on the balance sheet which is also available for this type of transaction. So we would either, depending on the size, it could be cash plus stock, or just cash.

For the quarter ended April 30, Ambarella had $235.2 million in cash and short-term investments.