Semiconductor processor manufacturer Ambarella (AMBA 43.24, -11.16) trades 20.5% lower this afternoon after guidance from the conference call overshadowed the Q2 beat and in-line Q3 outlook.
Since it’s quite obvious that AMBA is down today in reaction to the rough FY18 guidance cut from the conference call, let’s begin there. Management now believes revenues for the year will be down 3% to 7% from the prior year versus previous expectations for revenue growth of plus or minus 3%. The company highlighted several factors impacting the guidance, namely a more difficult drone market. AMBA now expects the drone market to decline year-over-year as low-priced drones from DJI negatively impact the higher-priced market segment. The company also pointed to a slower-than-expected growth rate in the new virtual reality market as reasoning for the updated outlook. That, plus a substantial decline in revenues from Tier 2 customers, should drag revenues below prior expectations.
Additionally, certain customers are now beginning to see a shortage of certain memory components in the market, impacting camera build schedules later in the year which by association negatively impacts the demand for AMBA chips. This slower growth expectation will be partially offset by a higher-than-expected revenue capture from GoPro (GPRO 9.16, -0.05 -0.54%) in the second half of the year which should lower the company’s total non-GoPro year-over-year revenue growth to 9-12%.
Now getting back to the Q2 print, AMBA reported earnings of $0.48 per share on revenues which rose about 10% compared to last year to $71.63 million. Q2 non-GAAP gross margins were 63.0%, compared with 67.1% for the same period in fiscal 2017.
Looking ahead to Q3, AMBA expects revenues between $87.5-90.5 million on non-GAAP gross margins in the range of 62.0-63.5%.
As weakness in the consumer drone market weighs on guidance, AMBA will have to put together a plan to combat it. As of now, it appears the company will rely more on the IP security and camera markets.
Based on the stock action this morning though, it appears that some investors aren’t going to wait around to absorb the second half weakness. The stock trades about 20x this year’s projected earnings and with today’s action trades about -20.3% lower YTD.