Ambarella (AMBA 1.07%) released its second-quarter earnings after market close on Sept. 1, delivering results that were better than the average analyst estimate as polled by Thomson Reuters. Net income of $29.7 million worked out to diluted earnings per share of $0.88, or 10% ahead of the Reuters poll target of $0.80. Revenue for the quarter was $84.2 million, ahead of the Reuters estimate of $81.73 million.
Despite a solid earnings beat, Ambarella shares are down more than 20% following the earnings release, owing to lower-than-expected guidance. During the briefing, CEO Fermi Wang and CFO George Laplante discussed second-quarter results and outlined the future of the business and competitive landscape. Here are five key takeaways from the call.
Third-quarter performance guidance
For the current quarter, Ambarella anticipates sales between $90 million and $93 million, a range that would represent year-over-year quarterly sales growth between 37% and 42%. Before the earnings call, the Wall Street consensus called for growth of 40.6%, and subsequent sell-offs and analyst commentary suggest disappointment with the company's sales target. Turning to margins, Laplante said the company anticipates non-GAAP gross margins for the third quarter to be between 62.5% and 64%, with the anticipated dip from gross margins of 65.3% in the second quarter coming from increased sales share for the relatively low-margin S2L line security chips.
Here's Laplante on third-quarter targets for net income, estimated tax rate, and share count:
We expect non-GAAP net income for the third quarter to between $29.5 million and $31.5 million. We're using an estimated non-GAAP annualized effective tax rate of 9% for net income amounts. We estimate our diluted share count for Q3 to be approximately 34.3 million shares.
Q3 wearable sales will be down, but overall momentum is strong
Ambarella's second quarter saw the release of an inordinately high number of new product releases, helping the company deliver 79.3% year-over-year sales growth and setting up unfavorable sequential and yearly comparisons for third-quarter segment performance. Here's Wang on the state of the wearables market and broader business in the third quarter:
I'd also like to point out that overall, Q3 guidance is showing that the wearable market is going down sequentially and also year over year because of the product ramping up slightly different from last year. But even with that down, our Q3 growth is still 40% year over year. I think that's an indication that we continue to extend our business on other markets.
With an apparent lack of big wearable camera releases in the third quarter, Ambarella is looking to new product releases in security, automotive aftermarket, and drone cameras to drive growth.
Demand for consumer security cameras is growing
So far, the large majority of Ambarella's revenues have come from its wearable and professional security IP cameras, but the company anticipates that adoption of consumer IP cameras will be a significant growth driver going forward. During the call, Laplante indicated that the company had seen increased demand from retailers for consumer security cameras, as well as service providers such as AT&T and Comcast. Here's Laplante on the outlook for consumer security cameras through the rest of the year and the role of service providers in spurring growth:
I think what we talked about in our Q1 call was the consumer IP security market going from low single-digit as a percent of revenue in the beginning of the year, and we feel it will exit the year in the high single digits as a percentage of revenue. So that's a pretty significant increase for us. We are on track to see that growth. We do believe that service providers are going to play a key role in that growth as more of them introduce bundles with security cameras included, like Comcast and AT&T.
Laplante also said the company is seeing similar momentum in China, with Internet service providers beginning to offer security cameras as part of smart home packages.
Ambarella's acquisition of VisLab should help it get design wins
In July, Ambarella acquired visual analytics firm VisLab for $30 million in cash, and the company anticipates that its new subsidiary can deliver wins in emerging product segments. Here's Wang on the company's most recent acquisition:
As part of the acquisition, VisLab's 29 researchers have joined Ambarella's advanced computer vision development team to help develop solutions targeting Ambarella's existing markets, as well as future markets, such as automotive OEM cameras. The acquisition of VisLab has added expertise gained from over 20 years of research, and development and is greatly enhancing our ability to define, develop and deploy future generations of computer vision solutions.
VisLab has developed computer vision technologies that could help Ambarella secure presence in smart cars and propel its broader efforts in Internet of Things tech. The VisLab acquisition could also prove beneficial to Ambarella's drone ambitions, as delivering high-performance solutions for object avoidance and self-piloting, in addition to top-notch video, will likely be necessary to remain at the forefront of the market. Ambarella anticipates that operating expenses for VisLab will run between $1.1 million and $1.2 million in each of the two remaining FY16 quarters. However, the company doesn't plan on reporting the unit's operating expenses separately going forward.
Ambarella believes it's positioned to fend off potential new competitors
Ambarella's high-performance, low-power-consumption video chips have helped it build a strong niche position in semiconductors. However, the company looks to be facing increased competition. Companies including Intel, Qualcomm, and NVIDIA have expressed interest in creating solutions for drone cameras -- a crucial market for Ambarella -- and new entrants in the space could represent a significant challenge to Ambarella's growth. Yet even with the possibility of new entrants from resource-rich competitors, Ambarella believes that the strengths of its solutions will help it continue to secure design wins. Again from Wang:
We haven't seen them taping out any chips like ours -- the power number and the performance number yet. So today in the market, while the Nvidia or Intel or Qualcomm compete with us, we always see their app processor there. So that's the only thing we're seeing. So whether they are doing something else, we are not quite sure. But at least they haven't talked to our customer about this.
Wang also emphasized that, thus far, customers in the drone market are putting an emphasis on video and image quality, and the lack of specialized solutions from competitors positions Ambarella to continue delivering the best-performing product.